New Zealand yesterday became one of the first developed economies to raise interest rates since the onset of the COVID-19 pandemic, as the central bank bids to rein in rising inflation.
In a widely tipped move, the Reserve Bank of New Zealand (RBNZ) yesterday lifted its base interest rate 0.25 points to 0.5 percent, ending an 18-month freeze aimed at keeping the economy ticking over during the COVID-19 crisis.
It signaled further increases were likely, with analysts predicting the cost of borrowing could reach 1.5 percent by the middle of next year.
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“It is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment,” the central bank said in a statement.
Emerging economies, such as Brazil, Russia and Mexico, have lifted rates in recent months, along with a small number of developed economies, such as South Korea.
Stock markets have been falling on concerns that extended central bank and government stimulus, as well as rising commodity prices, would spark inflation.
The US Federal Reserve has so far maintained its monetary policy stimulus, although markets expect a change before the end of the year.
The RBNZ cited a recovering global economy and increased international mobility caused by rising COVID-19 vaccination rates in making its decision.
It said inflation was set to rise because of higher oil prices, rising transportation costs and the impact of supply shortfalls, noting a global move toward tighter monetary policy was already under way.
“While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus,” the bank said.
The bank said New Zealand’s inflation rate was set to rise above 4 percent in the medium term, exceeding its 1 to 3 percent target range.
The base rate had been at a record low of 0.25 percent since March last year.
The rise had been widely flagged by the bank, but was delayed in August, when the nation was plunged into a national lockdown by a COVID-19 outbreak.
The virus has since been contained to Auckland and the bank signaled “further removal of monetary policy stimulus is expected over time.”
Kiwibank Ltd chief economist Jarrod Kerr said New Zealand monetary policy had entered its first tightening cycle in seven years.
“The Kiwi economy has solid momentum and the RBNZ has good reason to withdraw stimulus ... we expect today’s rate hike will be the first in a series of hikes towards 1.5 percent and possibly higher,” Kerr said.
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