New Zealand Hikes Rate Aggressively To Combat Persistently High Inflation
Despite the weak economic activity, New Zealand’s central bank lifted its benchmark rate more aggressively than expected on Wednesday, as inflation remains too high and persistent.
The Monetary Policy Committee of the Reserve Bank of New Zealand decided to raise the Official Cash Rate by 50 basis points to 5.25 percent. Markets had expected a quarter point hike.
The RBNZ has now raised the OCR by a cumulative 500 basis points since October 2021.
At the meeting, policymakers discussed both 25 and 50 basis point increases. Policymakers viewed that wholesale interest rates fell notably since the February Statement, and this could put downward pressure on lending rates.
As a result, a 50 basis point increase in the benchmark rate was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates.
The committee said the extent of moderation in core inflation and inflation expectations will determine the direction of future monetary policy.
They observed that the severe weather conditions in the North Island increased prices for some goods and services. This in turn, raised the risk of inflation expectations remaining persistently above the target range.
Policymakers observed that the interest rate needed to reach a level where the committee could be confident it would reduce actual inflation to within the 1-3 percent target range over the forecast horizon.
Given the slowing global economy, subdued residential building activity and the ongoing monetary policy tightening, New Zealand’s economic growth is projected to slow through 2023.
The Bank’s aggressive tightening confirms the view that New Zealand will enter a prolonged recession this year, Capital Economics’ economist Abhijit Surya said. As the downturn creates deflationary pressures, the bank is likely to pivot to rate cuts by year-end, the economist noted.
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