The Reserve Bank of New Zealand (NZ) on Tuesday raised its official cash rate (OCR) by 0.75 percentage points to 4.25% and hinted at further tightening. Although he expects a recession next year, he is stepping up his fight against inflation.
This was the biggest rate increase since the central bank introduced OCR in 1999. OCR is at its highest level since 2008. According to the minutes of its meeting, the Monetary Policy Committee (MPC) also considered raising rates by as much as one percentage point. Fifteen of the 21 economists surveyed by Bloomberg expected a rate rise of 0.75 percentage points.
OCR is expected to peak at 5.5% in the third quarter of 2023, according to New Zealand’s central bank. Previously, the peak was assumed to be 4.1%.
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RBNZ projects higher OCR track to curb inflation
Source: RBNZ
“There was consensus that the OCR needed to reach higher levels than previously indicated, and earlier, to ensure that inflation returns to its target range over the medium term,” the MPC said in a statement.
After raising rates by 0.5 percentage points for five consecutive meetings, New Zealand’s central bank accelerated the pace of tightening after higher-than-expected inflation and near-record low unemployment. Meanwhile, Australia and Canada have slowed their rate hikes amid heightened risks of a global recession.
New Zealand central bank governor Orr
Source: RBNZ
New Zealand’s central bank said it expects the domestic economy to contract for four consecutive quarters between April and June next year (second quarter).
However, the inflation rate was 7.5% in October-December this year (fourth quarter).It is expected to accelerate by 7.2% in the July-September quarter. We expect inflation to slow to 5% by the end of 2023, but not return to the midpoint of the 1-3% inflation target until the end of 2025. According to the central bank’s latest forecast, the OCR will gradually decline from the second half of 2024.
Short-term bond yields rise on central bank policy decisions. The yield on 2-year NZ government bonds, which are exposed to the policy interest rate, rose a provisional 19 basis points (bp, 1bp = 0.01%) to 4.58%, and the 10-year bond rose provisionally by 5bp to 4.21%.
After rising against the US dollar, the New Zealand dollar narrowed its gains to 1 NZ dollar = 0.6171 US dollar at 3:07 pm Wellington time (11:07 am Japan time).
Original title:New Zealand Step Up To Fight Inflation With Record Increase (3)(excerpt)
(I will add background and central bank outlook from the 4th paragraph onwards.)
