The Reserve Bank of New Zealand (RBNZ) yesterday raised interest rates for the second time in two months and signaled that it would need to tighten policy more quickly than previously expected to contain inflation.
The central bank’s Monetary Policy Committee lifted the official cash rate by one-quarter percentage point to 0.75 percent, as expected by most economists.
New forecasts published by the bank show the cash rate rising to 2 percent by the end of next year, a year sooner than projected three months ago.
Photo: Reuters
“Capacity pressures have continued to tighten” and “employment is now above its maximum sustainable level,” the central bank said. “A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.”
New Zealand is at the forefront of global stimulus withdrawal, as policymakers start to move away from the view that faster inflation caused by supply chain disruptions during the COVID-19 pandemic is transitory.
However, the New Zealand dollar and bond yields fell as some traders had wagered on a more aggressive 50 basis-point increase and a higher end point in the bank’s forecast tightening cycle.
The currency slipped 0.5 percent to US$0.6915, the lowest since early last month.
Two-year sovereign bond yields slumped 14 basis points to 1.96 percent, while 10-year yields retreated as much as 11 basis points to 2.50 percent. The NZSE top-50 stock index rallied.
The central bank expects to raise its benchmark rate to 2.5 percent by the third quarter of 2023, its new forecasts show.
Previously, it projected the cash rate plateauing at about 2 percent — its estimate of a neutral rate — from late 2023.
Speaking at a news conference after the decision, RBNZ Governor Adrian Orr said the central bank would take a “cautious” approach to tightening by moving in 25 basis-point steps “for now.”
One reason for that is that households are carrying a large amount of debt that makes them sensitive to interest rate changes, he said.
Bloomberg economist James McIntyre said: “We doubt the global and domestic backdrop will evolve in a way that justifies the RBNZ pushing rates above its own estimate of neutral by the end of 2022. Our forecast sees the RBNZ delivering only half of the 150 basis points of increases projected for next year.”
New Zealand’s job market is as tight as it has ever been, with the unemployment rate of 3.4 percent matching a record low, while inflation at 4.9 percent is well above the central bank’s target of 1 to 3 percent and forecast to accelerate further.
The bank now projects inflation running at 5.7 percent this quarter and next, before it gradually eases back toward 2 percent over the next two years.
At the same time, there’s uncertainty about the economic outlook.
New Zealanders are bracing for COVID-19 to spread across the country when Auckland comes out of lockdown and a border around the city lifts next month.
“There’s a lot of inflation pressure out there and the need for tighter policy is self-evident,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. “But there is also an underlying fragility due to both debt loadings and our reluctant transition to living with COVID in our communities.”
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