New Zealand central bank unexpectedly hikes rates 50 bps, kiwi rallies
NEW Zealand’s central bank unexpectedly raised its official cash rate (OCR) by 50 basis points (bps) to a more than 14-year high of 5.25 per cent on Wednesday (Apr 5).
The move defied expectations, with 22 of 24 economists in a Reuters poll forecasting that the Reserve Bank of New Zealand (RBNZ) would raise rates by just 25 bps. This is the 11th straight hike since it started raising rates in October 2021.
The central bank said inflation was still too high and persistent, and kept the door open to further tightening.
“The (monetary policy) committee agreed the OCR needs to increase, as previously indicated, to return inflation to the 1-3 per cent target range over the medium term,” it added.
Wednesday’s surprise decision saw the New Zealand dollar bounce 1 per cent to touch a two-month high of US$0.6383 before standing 0.74 per cent firmer at US$0.636. Two-year swaps jumped 15 bps to 5.11 per cent, still well below the March peak of 5.53 per cent, while the 90-day bank bill rate implies the OCR will peak at 5.5 per cent.
Capital Economics now expects the cash rate to peak at 5.5 per cent as well. It said: “Overall, the bank’s statement maintained a relatively hawkish tone. It noted upside risks to inflation stemming not only from recent extreme weather events but also from increased government spending.”
The RBNZ’s move was in contrast to Australia’s central bank, which kept rates on hold at its review on Tuesday.
At the RBNZ’s review in February, when it raised rates by 50 bps, it had signalled a 50-bp hike for April. But economists had forecast a smaller increase on the darkening outlook.
The central bank noted that while the level of economic activity over the fourth quarter was lower than anticipated and there were emerging signs of capacity pressures easing, demand continues to significantly outpace supply capacity.
“Inflation is still too high and persistent, and employment is beyond its maximum sustainable levels,” it said. Annual inflation ran at 7.2 per cent in the fourth quarter, just below a three-decade high.
The RBNZ added that severe weather events in January and February have led to higher prices for some goods and services. It expects economic activity to be supported by rebuilding efforts. REUTERS
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