The Reserve Bank of New Zealand (RBNZ) has raised the official cash rate (OCR) by 25 basis points to 0.75%. This is the second time in two months that the central bank has raised interest rates in an effort to curb inflationary pressures. This is amid the easing of pandemic restrictions that are expected to help boost economic activity.
A statement from the RBNZ said that this move was intended to continue reducing monetary stimulus needed to maintain price stability and support maximum sustainable employment. Much fiscal and monetary stimulus was injected into the economy during the pandemic and has helped the economy to recover more strongly than expected. It also resulted in rising inflation that hit 4.9% in the third quarter and the lowest jobless rate in over a decade.
The central bank added that further stimulus easing may be required and the OCR could be expected to rise above its neutral rate to cool the economy. the neutral level of interest rates has been estimated by the RBNZ to sit at about 2%, with new forecasts indicating it could rise to 2.6% by December 2023. This is an increase on earlier estimates from August that forecasted an increase to just 2.1%.
Economists believe that the RBNZ is predicting that the economy will run too hot for a while and will thus need restrictive policy to rein in inflation. The NZ economy has been outperforming peers with inflation and employment estimated to be performing at or above target levels. This is believed to have put pressure on the central bank to intervene by reducing monetary stimulus.
The RBNZ has attributed the rise in inflation to increased oil prices, rising transport costs and supply chain shortfalls. This is believed to have helped drive up prices due to domestic capacity constraints. Climate change was also identified as a contributing factor, with the RBNZ claiming its influence on price movements could be large and generally positive.
Borrowing costs are also expected to rise in response to these announcements. TBNZ governor, Adrian Orr, has warned homeowners that the hot property market would likely have to contend with tougher times ahead. He was especially concerned about new home buyers with externally high leverage levels that would have to cope with higher interest rates.
Chief economist at Westpac Bank, Michael Gordon, also voiced concern that the rates were likely to rise by a further 0.5% by February’s policy meeting, growing beyond 2.5%. He estimated that the cash rate could peak at 3% by the third quarter of 2023.
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