The RBNZ raises interest rates by 50 basis points and sticks to its plan for more rises.
Wellington (Reuters) -New Zealand’s central bank raised interest rates for the sixth time in a row on Wednesday and said it was still happy with its planned aggressive tightening path to stop inflation from getting out of control.
The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 50 basis points to 2.5 percent, a level that hasn’t been seen since March 2016. It was right to keep tightening quickly in order to keep prices stable and keep as many people as possible working.
Reuters polled a lot of economists, and almost all of them thought the central bank’s policy committee would raise the cash rate by 50 basis points. But there were rumours that the committee might change its “hawkish” view because business and consumer confidence had dropped in a scary way and house prices were falling faster than expected.
The central bank said in a statement, “The Committee agreed to keep its plan of quickly raising the OCR until it is sure that monetary conditions are enough to keep inflation expectations in check and bring consumer price inflation back to the target range.”
But it also said that the committee knew there was a risk that consumer prices would go up in the near future and that economic activity could go down in the medium term.
The New Zealand dollar didn’t change much after the mostly neutral statement, but interest rates are still going down. The two-year swap rate is now 3.845 percent, 5 basis points lower than it was previously.
INFLATION PEAK
The RBNZ has taken hawkish steps to stop inflation, which reached 6.9% in the first quarter, the highest rate in 30 years. It was one of the first central banks to pull back on stimulus during the pandemic. The cash rate has gone up ten times since October, when it was at a record low of 0.25 percent.
The RBNZ thinks that inflation will reach its highest point of 7% in the second quarter of 2022. This is much higher than its goal of 1% to 3%.
Next week’s price data for the second quarter will show if that prediction has been beaten. ANZ Bank said that surprisingly strong numbers could change the way interest rates go up in the future.
But ANZ also said that the RBNZ would probably have a harder time making decisions in the second half of the year as evidence grew that tightening financial conditions did in fact slow down demand and, in the long run, inflation pressures.
“How much is too much?” will become a much louder question, the report said.
Most economists, including those at ANZ, think that the central bank will raise interest rates by another 50 basis points in August. But there are more and more signs that the rise may slow down after that.
In a note, Barclays (LON:BARC) said that after a 50-basis-point increase in August, the balance of risk would shift to 25-basis-point increases. This is because there are more and more signs that domestic growth is slowing down.
