New Zealand’s central bank delivered its biggest interest-rate increase in 22 years, signaling that policy makers around the world may need to step up efforts to get inflation under control.
The Reserve Bank’s Monetary Policy Committee lifted the official cash rate by half a percentage point to 1.5% Wednesday in Wellington, the first time it has delivered an increase of that magnitude since 2000. The move wrong-footed 15 of 20 economists in a Bloomberg survey who expected a quarter-point adjustment. However, five predicted the half-point increase and investors had assigned it a 70% probability.
“The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations,” the RBNZ said. “It is appropriate to continue to tighten monetary conditions at pace.”
New Zealand is at the forefront of global policy tightening as central banks respond to an inflation surge that’s threatening to become entrenched. The Bank of Canada is expected to raise its key rate by half a point to 1% later today, while U.S. Federal Reserve policy makers have signaled they could move in half-point steps if needed, starting when they next meet in early May.
“The Fed is going to be hiking in 50 basis-point licks as well,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “It just shows the severity of the inflation that we have.”
Inflation is accelerating globally amid supply chain disruptions and the impact of Russia’s invasion of Ukraine on energy and commodity prices. Prices are rising at the fastest pace in three decades in New Zealand and Canada, while the U.S. rate of 8.5% is the highest since 1981.
The RBNZ has raised the cash rate for four straight policy meetings, lifting it by 125 basis points since October as inflation surged to 5.9%, almost twice the top of its 1-3% target band.
The risk is that the rapid rise in borrowing costs could stall the economy. House prices are already falling and business and consumer confidence have slumped amid New Zealand’s worst outbreak of the Covid-19 pandemic.
“With the housing market cooling more quickly than the RBNZ anticipated, over-steering the slowdown is a genuine risk,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.
“On the other hand, not authoritatively moving against broad-based inflation pressures that are miles out of line with the target — and yet to show any signs of turning — would risk giving a further leg up to inflation expectations, making the job of reining in inflation that much harder.”
The New Zealand dollar jumped after the decision before giving up its gains. It bought 68.26 U.S. cents at 4:35 p.m. in Wellington, down from 68.64 cents beforehand. Bond yields fell as traders pared estimates of how high the RBNZ could eventually take rates, with the yield on the five-year note sliding 11 basis points to 3.37%.
“A greater hike now reduces the chance of a larger increase later,” said Jason Wong, a currency strategist at Bank of New Zealand in Wellington. “In that sense, it was a dovish 50 basis-point hike with no change in the RBNZ’s view of the likely terminal rate.”
The central bank next reviews policy on May 25. Investors are pricing a more than 50% chance of a repeat half-point hike, swaps show.
In its statement, the RBNZ said it remains comfortable with the forward track for the cash rate it published in February, indicating it sees no need to take the benchmark higher than the 3.25% peak it forecast for the end of 2023.
However, it said it wants to get the OCR “to a more neutral stance sooner.” It estimates neutral is around 2%.
“The Committee noted that the OCR is stimulatory at its current level,” it said. “Members noted that annual consumer price inflation is expected to peak around 7% in the first half of 2022. The risk of more persistent high inflation expectations has increased.”
New Zealand’s ultra-loose pandemic policy settings helped drive house-price gains of 30% last year, while the closed border caused a labor shortage that’s seen unemployment plunge to 3.2%, a record low.
Now, the country’s rampant omicron outbreak is curbing household confidence and spending, and rising mortgage rates are pushing the housing market into retreat.
What Bloomberg Economics Says…
“The large hike should help to temper inflation expectations, but the RBNZ faces the risk that rapid rises in mortgage rates to end borrowers cool the housing market by more than anticipated.”
–James McIntyre, economist.
Russia’s invasion of Ukraine is worsening inflation while also hurting confidence and damping the economic outlook.
The RBNZ said its more aggressive move today “provides more policy flexibility ahead in light of the highly uncertain global economic environment.”