OCR Hike Fails to Tackle Core Inflation Woes

The Reserve Bank of New Zealand has raised its official cash rate (OCR) by 0.25% to 2.75%, a move that will have far-reaching implications for mortgage rates, business confidence, and household budgets.

However, the bank's decision comes at a time when inflation is driven largely by external factors beyond New Zealand's control. Annual inflation hit 4.1% in the year to June, well above the Reserve Bank's 1-3% target band.

The OCR hike will impact non-tradable inflation, which includes prices of goods and services produced and sold domestically. Borrowing becomes more expensive, dampening spending and slowing price rises.

But tradable inflation, driven by exchange rate movements and global commodity prices, remains a major concern. Tradable inflation rose 4.9% over the year to June, nearly doubling from 2.5% in March.

The main driver of this spike is petrol prices, up by 27.5%, with other vehicle fuels and lubricants rising more than 70%. Without these big fuel price hikes, headline inflation would have been around 2.9%, inside the Reserve Bank's target band.