New Zealand raises interest rates by 50 bps, signals more aggressive hikes

KEY POINTS

• New Zealand's central bank raised interest rates by 50 basis points to 2.0% on Wednesday, its fifth rate hike in a row as it seeks to get on top of inflation and signaled the cash rate would peak at a higher level than previously forecast.
• "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 the release of the statement the New Zealand dollar hit a three-week high of $0.65.

A pedestrians walks past the Reserve Bank of New Zealand headquarters in on Thursday, Aug. 9, 2018. New Zealand's central bank raised interest rates by 50 basis points to 2.0% on Wednesday, its fifth rate hike in a row as it seeks to get on top of inflation and signaled the cash rate would peak at a higher level than previously forecast.

Birgit Krippner | Bloomberg | Getty Images

New Zealand's central bank raised interest rates by 50 basis points to 2.0% on Wednesday, its fifth rate hike in a row as it seeks to get on top of inflation and signaled the cash rate would peak at a higher level than previously forecast.

All but one of 21 economists in the Reuters poll forecast the Reserve Bank of New Zealand (RBNZ) would hike the official cash rate (OCR) by 50 basis points to 2.0%. One economist expected a 25 basis point hike.

"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 the release of the statement 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 near 4.0% in the second half of next year and would 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 7.0% in the June quarter 2022, well above its 1-3% target, underlining the urgency to temper price-setting behavior.

"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 labor 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.