WELLINGTON: New Zealand’s central bank on Wednesday raised interest rates by 25 basis points to the highest in more than 14 years at 5.5% but indicated it was now done tightening, having undertaken its most aggressive hiking cycle since 1999.
While the 25-basis-point hike had largely been forecast by economists polled by Reuters, there had been growing expectation that the Reserve Bank of New Zealand might forecast further hikes in the official cash rate (OCR) in coming months.
“The big surprise was leaving the OCR forecast unchanged. It says they’re done (hiking), and the language in it kind of hints they’re done. So that is a major surprise,” said Imre Speizer, head of new strategy at Westpac.
He added the statement was very dovish.
The RBNZ forecasts the official cash rate to peak at its current level of 5.5% and remain there until the middle of 2024, according to the monetary policy statement (MPS) accompanying the rate decision.
“The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment,” the statement said.
A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has remained singularly focused on curbing inflation, lifting rates by 525 basis points since October 2021.
This has been its most aggressive policy tightening streak since the official cash rate was introduced in 1999.
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New Zealand’s annual inflation has come off in recent months and is currently running just below a three-decade high of 6.7%, with expectations it will return to the central bank’s 1% to 3% target within two years.
The New Zealand dollar slumped 1% to a three-week low of $0.6185 after the rate decision, reflecting surprise that the cash rate forecast was unchanged, while benchmark two-year interest rate swaps dropped to 5.2350%, pulling away from a 14-year high of 5.5750% earlier in the day.
The minutes said the committee had looked at the possibility of leaving the cash rate unchanged and the committee’s decision to increase the cash rate was supported by just five of the committee’s seven members.
The central bank is still forecasting a technical recession and is projecting negative growth in both the second and third quarters of 2023.
The Committee noted that slower global growth was reflected in weaker demand for New Zealand’s export goods and that the constraining impact of higher interest rates has been most visible in spending and economic activity related to housing.