New Zealand delivers half-point rate hike, still sees 5.5% peak
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NEW Zealand’s central bank raised interest rates by half a percentage point, slowing its pace of tightening, but signalled further hikes will be needed to tame inflation.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee lifted the Official Cash Rate (OCR) to 4.75 per cent from 4.25 per cent on Wednesday (Feb 22) in Wellington, as expected by 20 of 23 economists surveyed by Bloomberg. The bank’s forecasts show the OCR peaking at 5.5 per cent this year, unchanged from its previous projections though taking slightly longer to get there.
“While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation,” the RBNZ said in a statement. “The Committee agreed that monetary conditions need to tighten further.”
Slower-than-expected inflation and a softening labour market had fuelled bets the RBNZ would step back from a repeat of the jumbo 75 basis-point hike it delivered in November. Indications that economic growth will take a near-term hit from the impacts of Cyclone Gabrielle also warranted a less-aggressive approach, although the potential inflationary impacts from the disaster still need to be assessed.
The currency rose after the decision and traded at 62.35 US cents at 2.23 pm in Wellington.
RBNZ governor Adrian Orr will hold a press conference at 3.00 pm local time.
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New Zealand is still responding to the shock of Cyclone Gabrielle, which destroyed infrastructure, flooded homes and displaced thousands as it cut across the upper North Island last week. Orchards and food producing regions were devastated, suggesting near-term shortages and price spikes.
Storm’s impact
New Zealand’s Treasury Department yesterday said the rebuild of homes and infrastructure will add demand to an already capacity constrained construction industry and lead to general, nationwide inflation pressure. That could result in the RBNZ keeping interest rates higher for longer, it said.
The RBNZ said it’s too early to accurately assess the monetary policy implications of the storm. The timing, size, and the nature of the government’s fiscal response are also yet to be determined, it said.
The Committee’s current assessment is that over coming weeks, prices for some goods are likely to spike, activity will be weaker than previously expected and export revenues will be negatively impacted.
“Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects,” the central bank said. “In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.”
The RBNZ’s updated forecasts are little changed from those it presented in November. They show the OCR rising to 5.5 per cent in the fourth quarter of 2023 — previously it was in the third — then gradually declining from the third quarter of 2024.
Recession
The central bank reiterated it expects a recession starting in the second quarter of this year, but the economy is seen bouncing back a little sooner next year.
Inflation will accelerate to 7.3 per cent in the current quarter from 7.2 per cent in the fourth quarter of 2022, the new projections show. Inflation will be slightly firmer than previously expected through the second half of 2023 but return to the top of the central bank’s 1-3 per cent target range by the third quarter of 2024, unchanged from the previous forecast.
The RBNZ’s switch to a more moderate OCR increase brings it closer to global peers that have slowed the pace of tightening as rate-sensitive sectors of their economies start to weaken. Still, the half-point move puts New Zealand at the upper end of recent increases.
The Federal Reserve earlier this month raised by a quarter-point, slowing from a 50 basis-point hike in December and four consecutive 75 basis-point increases before that. Australia’s central bank down-shifted to quarter-point moves in October, although it turned hawkish in February after having considered a pause in December. BLOOMBERG
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