A former member of the Reserve Bank’s monetary policy committee says he believes the central bank has worked “way too hard” to dampen inflation and has increased interest rates too quickly.
The official cash rate has increased from 0.25% in August last year to 2.5%, taking home loan interest rates from as low as 2% to more than 5%.
Economist Rodney Dickens, who previously worked for the Reserve Bank, said there had been an 84% increase in the average mortgage rate in 16 months, compared to a 47% increase over five years the last time the central bank wanted to dampen inflation.
“In an extremely short period interest costs have risen dramatically more already than was needed to cool inflation last time. Considering this and it taking up to two years for changes in interest rates to impact on inflation, sound judgement points to a need to wait to see what impact the largest increase in interest costs on record will have rather charge ahead with even more aggressive OCR hikes.”
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The Reserve Bank has forecast a 4% OCR peak this cycle. Economists had suggested it might hit its inflation targets before it needed to get that high, but news this week that inflation was running at an annual pace of 7.3% prompted some to revisit that.
Dickens said it would usually take a year for interest rate increases to affect gross domestic product (GDP) and another year to hit inflation.
“With such aggressive increases in a short period of time, there’s no sense of thinking about what damage is this going to do. It runs a risk that they’re going to be a huge source of unnecessary volatility.”