New Zealand steps up inflation fight with record rate hike of 75 basis points

WELLINGTON - New Zealand’s central bank raised interest rates by a record 75 basis points and signalled further tightening ahead, stepping up its inflation fight even as

it forecasts a recession in 2023.

The Reserve Bank’s monetary policy committee lifted the official cash rate (OCR) to 4.25 per cent from 3.5 per cent on Wednesday. Its forecasts show the OCR peaking at 5.5 per cent in the third quarter of 2023, up from a previous peak of 4.1 per cent.

“The committee agreed that the OCR needs to reach a higher level and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term,” the Reserve Bank of New Zealand (RBNZ) said in a statement.

“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.”

The central bank is responding to stronger-than-expected inflation and near-record low unemployment, which support the case for it to accelerate the pace of tightening after five straight 50-point hikes. By comparison, some of its global peers are becoming more cautious about rate increases amid risks of a global recession.

“The statement was very hawkish,” said Mr Marcel Thieliant, senior economist at Capital Economics in Singapore. “It now seems likely that rates will peak closer to 5.5 per cent instead of our current forecast of 5 per cent.”

New Zealand’s 10-year government bond yield advanced as much as 11 basis points to 4.27 per cent after the decision while swap rates also climbed sharply. The currency pared its initial gains and traded at 61.65 US cents at 2.35pm in Wellington.

Today’s hike is the biggest since the RBNZ introduced the OCR in 1999 and takes the benchmark to its highest level since 2008. The policy committee considered raising the rate by as much as 100 basis points today, its record of meeting showed.

The bank projected that the economy will contract for four straight quarters starting from the second quarter of 2023.

But it predicted annual inflation will accelerate to 7.5 per cent in the final quarter of 2022 from 7.2 per cent currently. Inflation will slow to 5 per cent by the end of 2023 and is not seen returning to the midpoint of the 1 per cent to 3 per cent target band until late 2025.

The RBNZ’s updated forecasts show the OCR gradually declining from late 2024.

The bank’s more aggressive stance contrasts with moves to slow the pace of tightening among some of its peers. Reserve Bank of Australia policymakers returned to quarter-point hikes in October, citing the impact of higher borrowing costs on households.

And some US Federal Reserve officials are backing a downshift to half-point increments after a report showed a softening in core consumer goods inflation, while a majority of economists expect the Bank of Korea to revert to 25 basis-point hikes this week after a 50-point increase in October. BLOOMBERG