New Zealand raises interest rate, signals more aggressive tightening

A security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand
FILE PHOTO: A security guard stands in the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray

February 23, 2022

By Praveen Menon

WELLINGTON (Reuters) -New Zealand’s central bank raised interest rates back to pre-pandemic levels on Wednesday and signalled the possibility of a more aggressive tightening path to counter rising inflationary risks.

All but one of the 20 economists in a Reuters poll predicted the Reserve Bank of New Zealand’s (RBNZ) 25-basis point hike in the official cash rate (OCR) to 1.0% while one poll respondent expected a 50-basis point hike. Markets had also priced in the 25-basis point hike.

The hawkish tone in the RBNZ’s statement and its plans to sell its NZ$50 billion ($33.82 billion) bond holdings sent the New Zealand dollar soaring over 0.5% to $0.6765.

“All up, the RBNZ’s forecasts were hawkish,” said ASB Bank Chief Economist Nick Tuffley.

“The statement showed a need to lean much harder against inflation than in the November statement, and with some added concern expressed about the risk of high inflation becoming embedded,” he said.

RBNZ said it will commence the gradual reduction of its bond holdings under the Large Scale Asset Purchase (LSAP) programme through both bond maturities and managed sales.

It said it would not reinvest the proceeds of the bond maturities and that it plans to reduce the bond holdings at a pace of $5 billion a year.

The central bank lifted the projected OCR track to 3.35% by the end of 2024, much higher than the 2.6% endpoint predictions released in November.

The rate would reach 2.57% by March 2023, also a more aggressive path than the 2.3% seen in the previous forecast.

In a record of the meeting, the committee noted that a 50-basis point OCR move was strongly considered and members saw this as a “finely balanced decision.”

“The Committee also affirmed that it was willing to move the OCR in larger increments if required over coming quarters,” the summary said.

The RBNZ hiked rates at its last two meetings and signalled further tightening as it looked to cool a heated economy.

Global supply constraints pushed inflation to 5.9%, almost double the top of the bank’s 1-3% target range, while the jobless rate has hit a record low of 3.2%. House prices have also soared to historic highs.

But uncertainties remain over the outlook as the Omicron variant spreads more rapidly through New Zealand and the market braces for any global economic fallout from potential conflict in the Ukraine.

($1 = 1.4786 New Zealand dollars)

(Reporting by Praveen Menon; Editing by Sam Holmes)

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