New Zealand's central bank lifts interest rates to 7-year high

New Zealand's central bank lifts interest rates to 7-year high

This photo taken on May 10, 2018 shows the view of Auckland, New Zealand. PHOTO XINHUA SYDNEY - New Zealand's central bank lifted interest rates to a seven-year high on Wednesday and promised more pain as it struggles to cool red-hot inflation in an over-stretched economy.

The Reserve Bank of New Zealand's RBNZ policy committee raised its official cash rate by 50 basis points to 3.5 percent, the fifth such outsized move and the eighth hike in 12 months.

The committee even debated whether to hike by 75 basis points, given the price pressures in the economy, but decided on a half-point move.

The Committee agreed that it remains appropriate to tighten monetary conditions at a pace to maintain price stability and contribute to maximum sustainable employment, said Adrian Orr, RBNZ Governor.

Consumer price inflation is too high and labor resources are scarce. The hawkish commentary contrasted with a dovish turn by the Reserve Bank of Australia, which was downshifted to a quarter-point hike at its policy meeting on Tuesday.

The kiwi dollar was up 0.9 percent to US $0.5782, while the two-year swap rates went up 6 basis points to 4.51 percent. The largest daily dive since 2001 saw the rate drop 25 basis points on Tuesday.

This photo taken on October 10, 2020 shows a street view of Auckland, New Zealand. GUO LEI XINHUA Markets were pricing in a better than 60 per cent chance that the RBNZ would hike by another 50 basis points at its next meeting in November, and see rates peaking at 4.5 percent by May.

Jarrod Kerr, chief economist at Kiwibank, said the statement was punchy and hawkish and highlighted the need to demand-destruct inflation back to target.

He said more rate rises are required to meet mandates. We are forecasting a peak in this cycle of 4.0 percent. The risk is tilted towards even more policy tightening to 4.5 percent. ALSO READ: Fed set for big rate hike, waters choppy for world central banks as well as for big rate hike, ALSO READ:

Kerr warned that mortgage payments would put a heavy burden on household spending in the coming months because they had yet to catch up with the cash rate.

Minutes of the RBNZ meeting showed that the committee was aware of lags in monetary policy transmission and a slow pass-through to retail interest rates, which argued against a hike of 75 basis points.

Inflation was already at a 30-year high of 7.3 percent in the second quarter, and is poised to rise further, while unemployment was near historic lows at 3.3 percent.

The island nation of 5 million has a lack of workers with migration flows still to recover from a long Pandemic shutdown.

This photo shows people walking on a street in Wellington, New Zealand on May 14, 2020. MARTY MELVILLE AFP An influential survey of business conditions last week showed firms were downbeat on the outlook, with capacity constraints being the main headache.

74 percent of respondents said rising costs were the biggest drag on their business, while 43 percent cited finding labour as the main drag on their business.

Miles Workman, a senior economist at ANZ, said the signals on capacity and inflation pressures are the most important for the RBNZ right now. Capacity constraints easing at a snail's pace isn't enough to get core inflation back to an acceptable level in an appropriate time frame.