New Zealand Increases Official Cash Rate to Rein in Inflation

New Zealand Increases Official Cash Rate to Rein in Inflation
The $10 banknote on display at the Reserve Bank of New Zealand in Wellington, New Zealand, on Sept. 1, 2015. Mark Tantrum/Getty Images
Rebecca Zhu
Updated:

The New Zealand Reserve Bank has hiked interest rates by half a percentage point to two percent as it battles to contain inflation, which is currently at a 30-year high of 6.9 percent.

It is the second consecutive 50 basis points (bp) increase to two percent, with the Reserve Bank of New Zealand (RBNZ) indicating more hikes would come to return inflation back to its target range of one to three percent.

“The committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,” the monetary policy committee said.

It said New Zealand’s underlying economy remains strong, supported by a strong labour market, sound household balance sheets, and continued economic support.

However, headwinds were also strong, with heightened global economic uncertainty and high inflation curbing global consumer confidence.

“The committee agreed to continue to lift the official cash rate at pace to a level that will confidently bring consumer price inflation to within the target range,” it said.

It noted that global economic activity had slowed faster than expected, which could weaken growth.

With the Reserve Bank forecasting inflation to peak at seven percent in the first half of 2022, the central bank expects the cash rate to reach around 3.5 percent by the end of this year, and peak at 4 percent in 2023, with hikes being mostly frontloaded.

“A larger and earlier increase in the official cash rate reduces the risk of inflation becoming persistent while also providing more policy flexibility ahead in light of the highly uncertain global economic environment,” the committee said.

Members of the public walk through the Commercial Bay shopping centre in Auckland, New Zealand, on Nov. 22, 2021. (Hannah Peters/Getty Images)
Members of the public walk through the Commercial Bay shopping centre in Auckland, New Zealand, on Nov. 22, 2021. Hannah Peters/Getty Images

Economists widely expected the 50bp increase in May, with Westpac analysts expecting the committee to make three more 50bp hikes to come.

Bank of New Zealand senior economist Craig Ebert said the Reserve Bank had all of a sudden “clearly” become nervous about achieving its inflation target range while knowing the effects the monetary policy would have on the labour market.

“Having seen today’s monetary policy statement, we have taken the Bank’s full steam ahead signal on board and now expect a 50-point hike at the July Monetary Policy Review, to 2.50 percent,” he said.

Both Ebert and ANZ Chief Economist Sharon Zollner noted the tone of the statement had been unexpectedly “hawkish.”

“Today was a relatively straightforward decision for the [Reserve Bank], as expected, but what was less expected was the ‘all guns blazing' approach to future inflation risks," Zollner said.

“While the RBNZ certainly talked tough today, we expect the [Reserve Bank] will revert to a more standard pace of tightening, of 25bp at each meeting from August onwards, as hard landing risks demand attention.”

Chief economist Kevin Davidson at property research group CoreLogic noted that the implications of the rate hike were clear for the housing market.

“We’re not yet at the end of this rising cycle for mortgage rates, and that will keep a degree of downwards pressure on property values,” he said. “But that day of reckoning will happen within the next 12 months.”

“For the record, the [Reserve Bank] has indicated that house prices might drop by about 12 percent from peak to trough.”

Davidson said growing fears around a recession may mean the cash rate settles at a lower rate than currently projected, while the sustained low jobless rate would help protect the market from a major downturn to some degree.

“But it’s still looking likely that the current correction for property values isn’t over yet,” he said.

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