The New Zealand Reserve Bank (RBNZ) has delivered an unprecedented 0.75% interest rate rise to a total of 4.25% as it ramps up its attempt to tame high inflation, which is currently running at 7.2% for the third quarter of 2022.
Known as the official cash rate in New Zealand, interest rates there are now at the highest they have been since January 2009 just after the 2008 global financial crash.
Overall, the RBNZ has just made its eighth consecutive interest rate rise since October 2021. In August 2021, the official cash rate was only 0.25%.
The RBNZ has earned a reputation for being comparatively hawkish in attacking inflation, a sentiment that will be further enhanced by its latest move.
This rate hike will come as a blow for New Zealand’s businesses, consumers, and mortgage payers.
There was further gloomy news as the Bank also forecast New Zealand will enter a recession around September 2023, which is to stretch into 2024.
Although the downturn is expected to be shallow, with GDP expected to fall by 0.5% in the second quarter of 2023, and then by 0.3% the following quarter.
Many analysts predicted the rate rise, but the forecast of a recession will come as a surprise to some.
Inflation Headwinds Reason for Rate Rise
The Bank’s Monetary Policy Committee pushed the button on the record increase in interest rates due to significant inflationary pressures.
Domestically, demand has remained resilient and household spending has remained high, notwithstanding an increasingly depressed housing market, rising rates and increased uncertainty over the global economic picture.
Several factors have contributed to the domestic demand, including high employment rates, spiraling wages, and payments that have been distributed to help with the cost of living.
Additionally, government support to cope with the Covid-19 pandemic has also resulted in households having increased savings, further boosting spending power.
Tourism has also been given a lift as there has been a stronger rise in visitors to New Zealand than anticipated since its borders reopened due to the pandemic, as it closed them soon after the pandemic began.
Worker Shortages and Global Trends Add to Inflation Problem
As the unemployment rate remains extremely low at 3.3%, there are worker shortages in certain industries which are holding back output.
Yet these are shortages that are contributing to workers receiving a good deal in salary packages, adding to the issue of inflation.
The RBNZ expects that the unemployment rate will remain low, and that employers will hang on to their existing workforces.
On a global scale, the increase in energy and commodity prices due to the conflict in Ukraine has unsurprisingly contributed to inflation.
Goods that New Zealand imports have also increased in price, as the inflation menace has crossed borders across the world.
The weaker outlook for global demand, according to the RBNZ, will also result in lower growth.
New Zealand Falls, Stocks Increase
The New Zealand Dollar reacted slightly bullishly to the RBNZ rate hike, rising by a fraction against both the US Dollar and the Japanese Yen.
The benchmark domestic stock index, New Zealand 50 Index, unexpectedly rose after the rate rise announcement, albeit by the small margin of 0.08% to 11323.80.