New Zealand's central bank raised interest rates by a half-percentage point for a fifth consecutive meeting and signaled more to come, reinforcing the global drive to crush inflation.
The Reserve Bank increased its Official Cash Rate to 3.5% on Wednesday in Wellington, as expected, as the currency and bond yields went up. The RBNZ is in the midst of a tighter cycle since the OCR was introduced in 1999 to rein in spiralling consumer prices.
Nick Tuffley, chief economist at the ASB Bank, said the RBNZ is on track to deliver another 50 basis points in November and remains firm in its position. He predicts a peak rate of 4.25% in early 2023, with risks clearly skewed up. The currency jumped in response to the central bank hawkish tone, touching 58 US cents for the first time in 11 days before easing back. Bond and swap yields went up as stocks fell, while bond and swap yields went up.
New Zealand's policy determination reflects its view that inflation is the No. After it soared to a 32 year high in the second quarter, it was priority number 1 in the second quarter. Australia, which surprised markets Tuesday with a quarter-point increase, is trying to rein in consumer prices while keeping its economy afloat.
The Committee agreed it remains appropriate to continue to tighten monetary conditions at a pace, the RBNZ said in its post-meeting statement. Consumer price inflation is too high. The Federal Reserve has closed the gap with three 75-point moves to take its benchmark federal funds rate target to 3 3.25%, despite the RBNZ being at the forefront of global tightening.
The measures and projections of further tightening have boosted the dollar and weighed on other currencies including New Zealand s.
A lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon, the RBNZ said.
The benchmark rate rose to an average of 4.1% early next year, despite the fact that the bank didn't make any reference to its most recent projections in August. Some economists think the OCR will need to keep rising in 2023, with ANZ Bank New Zealand predicting a peak of 4.75%.
The RBNZ must balance the risk of inflation pressure from a weaker currency against the impact that its hikes are already having on the property market and economic activity after raising the OCR by 3.25 percentage points in 12 months.
House prices suffered their second biggest drop on record in the three months to September, while businesses remain downbeat about the economy and their own profitability.
The outlook of the RBNZ has not fully adjusted to global growth risks and an easing of inflation pressures. We think that the RBNZ will shift to smaller rate hikes over the coming months as it approaches the end of its tightening cycle. The RBNZ stated that policymakers considered hiking the benchmark by 75 basis points before opting for 50, with some members saying that a larger increase in the OCR would reduce the likelihood of a higher peak in the OCR being required.
The bank was unusually explicit in revealing the debate, said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. in Auckland. He believes that the OCR will rise to 4.5% by February.
The RBNZ is now nearing a higher peak than the 4.1% of its August projections. No Unstoppable Dollar Is Wreaking havoc Everywhere But America