New Zealand’s central bank continued its hawkish response to soaring inflation by announcing a seventh consecutive interest rate rise, as the official cash rate increased by 0.5% to 3%.
The latest rate hike is also the fourth straight 0.50% rise, and the first time since 2015 that a 3% benchmark level of interest rates has been set.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee decided that it was necessary to keep raising interest rates to continue to tighten monetary conditions.
It is viewed by the committee as a direction that will contribute to achieving maximum sustainable employment, as inflation is too high and labour resources remain scarce.
Many analysts forecasted that there would be a 0.50% rate increase, believing that the aggressive stance towards inflation from the RBNZ would continue.
In May the committee signaled its intention to attack inflation with a prolonged policy path of rate rises, by the end of this year it was projected that the official cash rate would reach 3.5%, before peaking at 4% in the middle of 2023.
Capital Economics has also said that it expects the RBNZ to raise rates up 4%, higher than its previous 3.5% forecast, but it does expect rate cuts to begin in 2024.
Unsurprisingly the RBNZ statement said the war in Ukraine was the underpinning headwind that has caused the rise in global inflation and commodity prices, resulting in the rate rise. Also, supply chain bottlenecks on a worldwide scale due to ongoing health risks from Covid-19 were blamed for rising global production costs. This situation that has been exacerbated by the extensive lockdowns that have been ordered by the Chinese government.
Overall, the expected weakening of global growth is reflected by the ongoing tightening in monetary conditions around the world, not just in New Zealand. Yet the consumer in New Zealand has remained resilient, as domestic spending has not been affected too badly despite the adverse economic conditions, which are more than likely to continue in the short to medium term.
Inflation Expectations Calmer
In its Monetary Policy Statement for August, the RBNZ revealed that annual inflation has continued to rise, reaching 7.3% in June.
While there is more positive news that inflation expectations have recently eased, it is still anticipated that prices will remain stubbornly high in comparison to recent history.
The Monetary Policy Committee do now believe that it will have to increase the official cash rate by more than what it expected last May to bring inflation down to target level, and it hopes that the CPI can fall to reach a level between 1% and 3% by the middle of 2024.
Market Reaction to RBNZ Rate Rise
Since the announcement of the interest rate rise, the NZD/USD currency pair gained initially before falling quite strongly. The New Zealand Dollar also initially gained ground against the British Pound as London opened earlier today. However, recent hours have seen the New Zealand Dollar on the decline almost everywhere. Although the rate hike was expected, the RBNZ seems to have triggered a selloff in its own currency.