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RBNZ Increases Interest Rates by 0.50%

Hawkish central bank warns of more rate rises ahead.

The Reserve Bank of New Zealand (RBNZ) has raised its interest rates by 0.50% to a 14-year high of 4.75% and signaled that there will be further rate rises to come in its attempt to combat high inflation.

However, the Bank has eased the pace of the rate rises since November, when the increase in borrowing costs reached 0.75%.

The 0.50% increase matched the expectations of most analysts, including the predictions of banking giants Barclays and Westpac.

Overall, the latest decision from the Monetary Policy Committee (MPC) was the tenth consecutive rise in interest rates stretching back to August 2021, where rates were at a far lower 0.25%.

The MPC admitted that they did discuss a further 0.75% rate rise.

According to the monetary policy statement which accompanied the rate decision, the RBNZ anticipates that the official cash rate will peak at 5.5% during 2023.

The Bank has acquired a global reputation of being hawkish in the battle against high inflation, and now New Zealand’s interest rates are on par with the United States at a relatively high 4.75%. Yet this is far higher than neighboring Australia, which recently raised its rate to 3.35%.

In the last interest rate statement, the Bank forecasted that New Zealand would fall into recession around September 2023, with GDP contracting by 0.5% in the second quarter of 2023.

A downturn over a 9-to-12-month period is still being forecast.

The MPC said that the impact of monetary tightening is yet to be felt in the economy.

High Inflation Cause of Rate Rise 

Widespread inflation, which has remained stubbornly high at 7.2% in the quarter up to December 2022, has provoked yet another rate rise, according to the RBNZ.

Core inflation, which excludes the currently volatile food and energy prices, has also remained high.

The effects of the disastrous Cyclone Gabrielle led to severe devastation across parts of the North Island.

As the disruption will lead to shortages in goods and services, the upward pressures on prices are strongly likely to increase inflation, the RBNZ noted.

The best thing that the RBNZ said it could do is to free up resources, with its monetary policy slowing demand with higher interest rates.

It will also limit the cost of living pressures.

The RBNZ is also concerned over an increasingly tight labor market, where employment is above the maximum sustainable level.

Worker shortages with an unemployment rate of 3.4% for the final quarter of last year, have led to an acceleration of wage growth.

Household incomes are being improved, at the cost of domestic inflationary pressure with increasing business costs.

The continuation of raising interest rates is designed to bring down employment to a more viable level, alongside reducing prices.

Economy Robust Amid Tourism Recovery 

Despite the gloomy prediction of recession this year, the RBNZ revealed that demand in the New Zealand economy was vigorous over the course of last year.

Growth was supported by household spending and activity in the construction sector.

Overall business confidence is weakening under the current headwinds, the RBNZ said.

Yet the tourism market has continued to recover since international borders were reopened following the peak of the pandemic.

Restaurants and accommodation outlets have benefited from the release of pent-up demand.

New Zealand Dollar Rises Then Falls, Stocks Decline 

The New Zealand Dollar unsurprisingly rose against some of its currency rivals after the announcement of the rate rise, with more increases forecast, before falling back.

The NZD/USD currency pair rose to almost $0.6250 before tumbling back to $0.6200.

The benchmark S&P/New Zealand 50 index reacted negatively, declining by 0.06% in the first hours following the rate decision.

Peter Taberner
About Peter Taberner
Peter has been a UK-based freelance journalist for over 15 years, and has written for several financial publications including Funds Europe, Trade Finance Magazine, International Finance Magazine.

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