New Zealand Hikes Interest Rate By 50 Bps; Hints At More Tightening

newzealandcentralbank sept25 17aug22 lt

New Zealand's central bank raised its benchmark rate by another 50 basis points and hinted at more to come as policymakers focused on inflation pressures and capacity constraints.

The Monetary Policy Committee of the Reserve Bank of New Zealand on Wednesday decided to lift the Official Cash Rate to 3.00 percent from 2.50 percent. The outcome of the meeting came in line with expectations.

The seventh consecutive rate hike has taken the interest rate to its highest level since mid 2015.

The committee assessed that they will need to raise the benchmark rate by more than expected in May to bring inflation to the 2 percent target midpoint and employment to its maximum sustainable level.

Currently inflation is higher than target, and employment is well above its maximum sustainable level, members said.

Domestic demand remained resilient despite headwinds over the first half of the year.

Underpinned by high level of employment, savings built up during the lockdowns and government support payments, household spending is holding up despite low consumer confidence and high inflation, the committee observed.

The tight labor market is adding to high inflation, with wage growth continuing to increase. Nonetheless, growth in wages is being outpaced by the rising cost of living.

Policymakers noted that house prices continued to fall towards more sustainable levels. House prices are projected to fall further over coming months as higher interest rates, tighter lending conditions and rising costs weigh on demand.

Moreover, acute labor and material shortages in the construction sector constrained activity and contributed significantly to domestic inflationary pressures.

Capital Economics economist Marcel Thieliant expects the RBNZ to hike its rate to a peak of 4.00 percent instead of the previous forecast of 3.50 percent. However, the bank will start to cut rates next year as inflation is likely to moderate faster than the central bank expectations, the economist noted.

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