New Zealand’s central bank lifts interest rate to 7-year high

Reserve Bank of New Zealand raises the benchmark rate by half a percentage point in the fifth straight outsized hike.

New Zealand's central bank has raised its key interest to a seven-year high [File: David Gray/Reuters]

New Zealand’s central bank has lifted interest rates to a seven-year high and promised more pain to come as it struggles to cool red-hot inflation in an over-stretched economy.

The Reserve Bank of New Zealand’s (RBNZ) policy committee on Wednesday raised its official cash rate – the rate commercial banks are charged for loans, which in turn affects the cost of mortgages and other borrowings – by 0.5 percentage points to 3.5 percent, the fifth such outsized move and the eighth hike in 12 months.

The committee even debated whether to hike by 0.75 percentage points given intense price pressures in the economy, but decided on a half-point move.

“The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment,” said RBNZ Governor Adrian Orr in a statement.

“Core consumer price inflation is too high and labour resources are scarce.”

The hawkish commentary contrasted with a dovish turn by the Reserve Bank of Australia which downshifted to a quarter-point hike at its policy meeting on Tuesday.

Investors reacted by pushing the kiwi dollar up 0.9 percent to $0.5782, while two-year swap rates rose 6 basis points to 4.51 percent. Rates had fallen 0.25 percent on Tuesday in the largest daily dive since 2001.

Markets were pricing in a better than 60 percent chance the RBNZ would hike by another 0.5 percentage points at its next meeting in November and see rates peaking at 4.5 percent by May.

“The statement was punchy and hawkish, and highlighted the need to demand-destruct inflation back to target,” said Jarrod Kerr, chief economist at Kiwibank.

“More rate rises are required for mandates to be met,” he added. “We continue to forecast a peak in this cycle of 4.0 percent. Although the risk is clearly tilted towards even more policy tightening to 4.5 percent.”

Kerr warned that mortgage payments had yet to catch up with the cash rate and would put a heavy burden on household spending in coming months.

Minutes of the RBNZ meeting showed the committee was aware of lags in monetary policy transmission and a slow pass-through to retail interest rates, which argued against a hike of 0.75 percentage points.

Inflation was already at a 30-year high of 7.3 percent in the second quarter and is set to rise further, while unemployment was near historic lows at 3.3 percent.

The island nation of 5 million is desperately short of workers with migration flows yet to recover after a long pandemic shutdown.

An influential survey of business conditions out this week showed firms were downbeat on the outlook with capacity constraints the main headache.

Rising costs were reported by 74 percent of respondents, while 43 percent cited finding labour as the major drag on their business.

“The signals on capacity and inflation pressures are most important for the RBNZ right now,” said Miles Workman, a senior economist at ANZ. “Capacity constraints easing at a snail’s pace isn’t enough to get core inflation back to an acceptable level in an appropriate time frame.”

Source: Reuters