NZ raises rates by 0.5%

The Reserve Bank of New Zealand (RBNZ) has announced an increase in interest rates to a 14-year high of 4.75%. The bank indicated that it intends to continue tightening further, as inflation remains too high. The decision came in line with expectations, with 20 out of 25 economists surveyed by Reuters predicting the 50-basis point hike. The RBNZ added that although there were signs of price pressure easing, near-term inflation expectations remained elevated, employment was still beyond its maximum sustainable level, and core consumer price inflation remained too high.

The monetary policy statement accompanying the rate decision suggested that the RBNZ still expects the cash rate to peak at 5.5% in 2023. Although recent weather events, including a devastating cyclone and floods in New Zealand’s North Island, are likely to have some short-term impact on inflation, the bank still expects to look past the resultant short-term price pressures. The decision was a hawkish signal to markets, as the local currency surged in response.

The RBNZ noted that the two weather events have caused significant regional impacts across the country, which have resulted in billions of dollars in damage and caused the deaths of 15 people. However, the central bank sees the government’s fiscal policy response as more effective than any monetary policy action in addressing these issues.

ASB Bank’s chief economist, Nick Tuffley, believes that the RBNZ’s job of curbing inflation will only become more challenging in the wake of the weather disasters. ASB Bank is forecasting another 50-basis point rate increase in April, with some risk that the RBNZ will take further action over time. Despite the recent weather events, the RBNZ still expects the country to slip into a recession in the second quarter of this year but predicts that growth will rebound in the first quarter of 2024, which is earlier than its previous forecast.

ANZ Bank economists believe that the likely medium-term inflation impacts of the cyclone have tilted the risks around the forecast 5.25% OCR peak to the upside, but they also acknowledge that the picture needs to become clearer before any further action is taken. The decision made by the RBNZ shows the bank’s concern over high inflation rates and its determination to address the issue. The announcement has also sent a strong message to markets, with investors and economists carefully monitoring the RBNZ’s policy actions going forward.