Wellington Oct 6 (BUS): New Zealand’s central bank raised interest rates on Wednesday for the first time in seven years and signaled further tightening ahead, as it looks to beat inflationary pressures and cool an overheated housing market. .
The 25 basis point rate hike marks the beginning of a tightening cycle that was expected to start in August, but was postponed after the delta-variable outbreak of the coronavirus and an ongoing shutdown in its largest city, Auckland.
The increase in the liquidity ratio to 0.50% by the Reserve Bank of New Zealand (RBNZ) had been expected by all 20 economists polled by Reuters.
The New Zealand dollar rose briefly after the announcement but fell back to $0.6930, in line with broader market moves.
“It was pretty much in line with what everyone was picking,” said Jason Wong, chief market strategist at BNZ in Wellington. “We’re on our way to a series of price increases and the market is well priced for that.”
Announcing its decision, the Reserve Bank of New Zealand announced that further monetary policy stimulus is expected to be canceled, with future moves dependent on medium-term expectations for inflation and employment.
The rate hike puts New Zealand ahead of most other advanced economies as central banks look to reduce emergency-level borrowing costs, although countries such as Norway, the Czech Republic and South Korea have already raised interest rates.
In neighboring Australia, the central bank kept interest rates at a record low 0.1% for the eleventh consecutive month on Tuesday.
A Reuters poll showed that economists expect the benchmark rate to reach 1.50% by the end of next year and 1.75% by the end of 2023.
The South Pacific nation has enjoyed a rapid economic recovery since the recession caused by the coronavirus last year, in part due to eliminating the coronavirus and reopening its economy before others.
But with its borders still closed, shortages of labor and goods are driving up inflation, as well as contributing to a soaring real estate market, which has been driven by very low interest rates.
The RBNZ Committee noted in the meeting minutes that “a demand shortfall is less important than an economy hitting capacity constraints…”.
The central bank said that headline CPI inflation is expected to rise above 4% in the near term but will return towards the mid-point of 2% in the medium term.
She added that recent COVID-19 restrictions have not fundamentally changed the medium-term outlook for inflation and employment, and economic activity will recover quickly when measures are eased.
But economists said the RBNZ may not race the hiking cycle in light of the current global uncertainty and variable delta outbreak in Auckland.
“(We) maintain our view that further rate increases will be 25 basis points instead of 50 basis points,” said Josh Williamson, chief economist at Citibank.
New Zealand ditched its strategy to eliminate COVID-19 this week, as the government said it would have to live with the virus and increase vaccination rates to control it.
In August, a central bank official confirmed that it had also considered a 50 basis point move that month, before raising rates entirely due to the shutdown.
HF