New Zealand’s central bank yesterday raised interest rates by half a percentage point, its biggest hike in 22 years, indicating it is worried that inflation is getting out of control.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee lifted the official cash rate (OCR) to 1.5 percent from 1 percent, the first time it has delivered an increase of that magnitude since 2000.
“The committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations,” the RBNZ said. “It is appropriate to continue to tighten monetary conditions at pace.”
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The central bank has raised the cash rate for four straight policy meetings, lifting it by 125 basis points since October last year, as inflation surged to a 32-year high. The risk is that the rapid rise in borrowing costs could stall the economy. House prices are already falling, and business and consumer confidence have slumped amid New Zealand’s worst COVID-19 outbreak.
“The RBNZ’s decision to accelerate its hiking cycle shows it is willing to move decisively to get a hand on surging inflation,” said Ben Udy, an economist at Capital Economics in Singapore. “We expect it to hike the OCR to 3 percent by the end of this year.”
In its statement, the RBNZ said it remains comfortable with the forward track for the cash rate it published in February, indicating it sees no need to take rates higher than the 3.25 percent peak it forecast for the end of next year.
However, it said it wants to get the OCR “to a more neutral stance sooner.”
It estimates a neutral level for the cash rate is about 2 percent.
“The committee noted that the OCR is stimulatory at its current level,” it said. “Members noted that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022. The risk of more persistent high inflation expectations has increased.”
The RBNZ aims to keep inflation around the middle of a 1 to 3 percent target range.
New Zealand is at the forefront of global policy tightening as central banks around the world respond to an inflation surge that is threatening to become entrenched. The Bank of Canada was expected to raise its key rate by half a point to 1 percent later yesterday, while the Bank of Korea might add to its three rate hikes today.
The US Federal Reserve began its tightening cycle last month and its policymakers have signaled they could move in half-point steps if needed. The Reserve Bank of Australia this month opened the door to rate increases, with economists tipping its first hike would come in early June.
“Heightened global economic uncertainty and inflation are dampening consumer confidence,” the RBNZ said. “The rise in mortgage interest rates — amongst other factors — have acted to reduce mortgage demand and house prices.”
Russia’s invasion of Ukraine is worsening inflation by driving up commodity prices, while also hurting confidence and dampening the economic outlook.
“A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment,” the RBNZ said.
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