New Zealand’s central bank has raised interest rates to record levels and warned the economy may have to spend a full year in recession to keep sky-high inflation under control.
The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 75 basis points to 4.25% on Wednesday, with the key being that the rate will now peak at 5.5%, compared to a previous forecast of 4.1%. The central bank’s overtly hawkish tone caught some traders off guard, boosting the local dollar and pushing up swap rates, even as its recession forecast surprised.
The Reserve Bank of New Zealand expects the economy to contract in the second quarter of 2023 and continue into the first quarter of 2024.
RBNZ Governor Adrian Orr told a news conference that “inflation is no one’s friend and in order to wean the country off inflation we need to reduce the level of spending,” he added, “That means we’re going to go through a period of negative GDP growth.”
The minutes showed that the RBNZ even considered raising interest rates by a full 100 basis points.
Markets quickly priced in a change in rate expectations.
The RBNZ’s ninth consecutive rate hike means the cash rate has risen by 400 basis points since October 2021, the most aggressive policy tightening since the cash rate was introduced in 1999, and the cash rate is now at its highest level since January 2009 Level.
“The RBNZ’s stance has been very hawkish, including discussions of the possibility of a 100 basis point hike,” ASB said in a note.
While 15 of 23 economists polled by Archyde.com expect the central bank’s policy committee to raise the cash rate by 75 basis points, the level of hawkishness in the central bank’s forecasts and language has been striking.
ASB added that the statement showed “clear urgency”, but with three months to go until its next decision, the RBNZ will now watch the data flow to see if the level of hawkishness remains appropriate.
Inflation is now just below a three-decade high, non-traded inflation — or prices of goods not exposed to global markets — is hitting record highs, and there are signs that wage pressures are heating up, while inflation Expectations show no sign of slowing down.
ANZ notes that the RBNZ is conducting monetary policy in a cloud of uncertainty and continues to be open to the fact.
“In this environment, it makes sense to consider the costs of being wrong in either direction, and these are simply not comparable,” ANZ said.
ANZ said that if the data did deteriorate significantly before the next meeting, it might adjust with little harm, but if the opposite happened, the RBNZ would regret not taking tougher measures.
House prices – which had been an important inflationary factor in the tightening cycle – are now down regarding 11%, according to the central bank, and the Reserve Bank of New Zealand expects prices to fall 20% from their peak in November 2021.
