New Zealand’s central bank raised interest rates to record highs and warned that the economy could have to spend a full year in a recession to keep skyrocketing inflation in check.
The Reserve Bank of New Zealand (RBNZ) raised its official cash rate (OCR) by 75 basis points to 4.25% on Wednesday, with the key that the rate will now peak at 5.5%, from an earlier forecast of 4.1%. The central bank’s overtly aggressive tone caught some traders off guard, boosting the local dollar and pushing up swap rates, even as its recession forecasts came as a surprise.
The Reserve Bank of New Zealand expects the economy to contract in the second quarter of 2023 and continue in the first quarter of 2024.
RBNZ Governor Adrian Orr told a press conference that “inflation is nobody’s friend and to wean the country off inflation we need to reduce the level of spending,” he added, “This means we will go through a period of growth negative GDP”.
The minutes showed that the RBNZ even considered raising interest rates by as much as 100 basis points.
Markets quickly priced in a change in rate expectations.
The 9th consecutive rate hike by the RBNZ 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 highest level since January 2009.
“The RBNZ stance has been very aggressive, including discussions about the possibility of a 100 basis point hike,” the ASB said in a statement.
While 15 of 23 economists polled by Reuters expect the central bank’s policy committee to hike the exchange rate by 75 basis points, the level of aggressiveness in the central bank’s forecasts and language was surprising.
The ASB added that the statement showed “a clear urgency”, but three months from its next decision, the RBNZ will now be watching the data stream to see if the level of aggressiveness remains appropriate.
Inflation is now just below a three-decade high, untraded inflation – or commodity prices not exposed to global markets – is reaching record highs and there are signs that wage pressures are heating up, while expectations inflation show no sign of slowing down.
ANZ notes that the RBNZ is conducting monetary policy in a cloud of uncertainty and remains open to the fact.
“In this environment, it makes sense to look at the costs of going wrong both ways, and these are simply not comparable,” ANZ said.
ANZ said that if data deteriorates significantly before the next meeting, it could fix itself with little harm, but if the reverse were the case, the RBNZ would regret not taking tougher action.
House prices – which had been a major inflationary driver in the tightening cycle – are now down about 11%, according to the central bank, and the Reserve Bank of New Zealand expects prices to fall 20% compared to the previous year. peak November 2021.
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