New Zealand hikes interest rates for second straight month as inflation risks grow

  • New Zealand's central bank lifted interest rates for the second time in as many months on Wednesday, driven by rising inflationary pressures and as an easing of restrictions supported economic activity.
  • The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 25 basis points to 0.75% in the final policy meeting of the year.
  • RBNZ said further stimulus easing may be needed and the OCR may go above its neutral rate.

New Zealand's central bank lifted interest rates for the second time in as many months on Wednesday, driven by rising inflationary pressures and as an easing of coronavirus restrictions supported economic activity.

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 25 basis points to 0.75% in the final policy meeting of the year, saying it was appropriate to continue reducing monetary stimulus to maintain price stability and support maximum sustainable employment.

All but two of 23 economists in a Reuters poll predicted the RBNZ would raise rates by 25 basis points at the meeting. Markets had fully priced in a 25 basis point rise.

RBNZ said further stimulus easing may be needed and the OCR may go above its neutral rate.

"The Committee expected that the OCR would need to be progressively increased and, conditional on the economy evolving as expected, the OCR would likely need to be raised above its neutral rate," the bank said in the minutes of the meeting.

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Its forecasts signaled a more aggressive tightening cycle, reaching 2.5% by 2023 and going higher by December 2024.

"Given the heat in the economy we think the RBNZ is far from done," said Ben Udy, economist at Capital Economics. "We expect the Bank to continue to hike rates to hike next year to around 2.0% by the middle of next year."

Large amounts of fiscal and monetary stimulus injected to alleviate pandemic pain have helped New Zealand's economy recover strongly and pushed inflation to its highest and the jobless rate to its lowest in over a decade.

Annual inflation hit 4.9% in the third quarter, the fastest pace in more than a decade while the jobless rate fell to 3.4%, matching its lowest on record from December 2007.

Meanwhile, house prices have doubled over the past seven years and are the most unaffordable among OECD nations.

These pressures prompted RBNZ to raise rates in October and flag more tightening.

The country is now set to end lockdowns and move into a system of living with the virus from Dec. 3, allowing all businesses to resume operations.

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