New Zealand battles inflation with record rate hikes

The New Zealand’s central bank raised interest rates by a record 75 basis points, with more tightening to comeStepping up its fight against inflation even as it expects a recession next year.

Short-term bond yields rose after The RBI’s monetary policy committee will raise the official cash rate (OCR) to 4.25% in Wellington on Wednesday. From 3.5%, as expected by most economists. Their projections indicate that the official interest rate will peak at 5.5% in the third quarter of 2023, compared with a previous high of 4.1%.

“RBNZ sees inflation too entrenched”, Westpac Banking Corp chief economist Michael Gordon said. “He now believes that a slowdown will be needed to bring inflation back into the 1-3% target range.”

The policy-sensitive 2-year New Zealand government bond yield was up 19 basis points to 4.58%, while the 10-year yield was up 5 basis points to 4.21%. Exchange rates also rose sharply as the currency pared its early gains to trade at 61.71 cents at 3:07 pm in Wellington.

The central bank responds Stronger-than-expected inflation and near-record unemployment support arguments for accelerating the pace of tightening after five consecutive 50-point hikes. In comparison, both Australia and Canada have scaled back their rate hikes amid fears of a global recession.

“The panel agreed that the OCR should reach a higher level, and sooner than previously indicated, to ensure that inflation returns to its target range over the medium term,” the RBNZ said in a statement.

“Underlying consumer price inflation is very high, employment is well beyond its maximum sustainable level, and near-term inflation expectations have risen.”

100 points are considered

Today’s hike is huge The RBNZ introduced the OCR in 1999 and brings the benchmark to its highest level since 2008.. The Monetary Policy Committee today examined the possibility of raising interest rates by up to 100 basis points, according to its meeting minutes.

The bank predicts the economy will contract for four consecutive quarters starting in the second quarter of next year.

But he predicted it Annual inflation will increase to 7.5% in the last quarter of this year from the current 7.2%. The increase in consumer prices is expected to slow to 5% by the end of 2023 and is not expected to return to the mid-range of the 1-3% target until the end of 2025.

Updated RBNZ projections show that the OCR will gradually decline from the end of 2024.

“For the committee to achieve the objectives of its mandate, actual and expected inflation must fall significantly,” the RBNZ said.

“Members pointed out that the longer actual inflation stays above the target band, the more likely it is that higher inflation expectations will hold.”

The RBNZ’s more aggressive stance contrasts with the Australian central bank’s move to quarter-point gains in October, from earlier half-point moves. Citing the impact of high borrowing costs on households.