New Zealand raises interest rates amid inflation concerns

Reserve Bank of New Zealand lifts benchmark interest rate to 2 percent in fifth consecutive hike.

New Zealand central bank building entrance.
New Zealand's central bank raised interest rates by 0.5 of a percentage point to 2 percent on Wednesday [File: David Gray/Reuters]

New Zealand’s central bank raised interest rates by 0.5 of a percentage point to 2 percent on Wednesday as it tries to get a handle on inflation while signalling the benchmark rate would peak at a higher level than previously forecast.

All but one of 21 economists in the Reuters news agency poll forecast the Reserve Bank of New Zealand (RBNZ) would hike the official cash rate (OCR) to 2 percent.

“A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment,” the RBNZ said in a statement following its fifth rate hike in a row.

Following the statement’s release, the New Zealand dollar hit a three-week high of $0.65.

Wednesday’s move was the second successive 50 basis point increase in the OCR. The rate has now risen by 1.75 percentage points since the tightening cycle started in October. It projected that the cash rate would rise to nearly 4.0 percent in the second half of next year and remain there into 2024.

The increase took the cash rate to its highest since November 2016. The RBNZ has been a frontrunner in a global shift towards removing extraordinary stimulus put in place during the pandemic as authorities try to contain surging inflation.

The central bank sees inflation peaking at 7 percent in the June quarter of 2022, well above its 1-3 percent target, underlining the urgency to temper price-setting behaviour.

“A broad range of indicators highlight that productive capacity constraints and ongoing inflation pressures remain prevalent,” the central bank said. It added that headwinds are strong, and heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence.

The rate rise comes as the RBNZ tries to navigate competing economic challenges, including a tight labour market and inflation at three-decade highs.

But house prices are now falling after surging through the pandemic, and business and consumer confidence has dipped as the Ukraine war poses risks to global growth.

Source: Reuters