The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee raised interest rates by 0.25% to 5.5%, but signaled that its current cycle of rate hikes would be over.
The Reserve Bank of New Zealand raised its official cash rate by 0.25% as expected, but also signaled that it would be the last increase in the current cycle, which came as a surprise.
There have been 12 consecutive increases in borrowing costs since August 2021, with initial rates as low as 0.25%, and the RNBZ’s latest move will reflect the view that it is one of the world’s most hawkish central banks.
In a statement released by the bank, an excerpt reads: “The committee agreed that the level of interest rates is restraining spending and inflationary pressures. The bank also said the official cash rate (OCR) would have to remain at a “restrictive level” for the foreseeable future. if the inflation rate is to be reversed back to the government’s target of between 1% and 3%.
Official data revealed that annualized inflation in New Zealand fell to 6.7% in the first quarter of this year from 7.2% in the last quarter of last year.
Price growth peaked in the second quarter of last year at the level of 7.3%.
The RBNZ projected that inflation would continue to decline from its peak and eventually meet its inflation target.
However, core inflationary pressures are expected to remain here until capacity constraints ease in the future.
There are signs that New Zealand’s tight labor market is starting to ease, even though employment is above its maximum sustainable level, as there are signs that labor shortages are easing and more vacancies are being filled.
Net migration has returned following the re-opening of international borders that were closed due to Covid-19. It is expected to reach pre-pandemic levels in the coming quarters. This has helped address labor shortage problems, but it is not yet certain how much increased migration is contributing to overall spending.
There is evidence that the tourism industry has recovered, with activity in the sector now three-quarters of what it was before the pandemic, and a significant factor supporting domestic demand with increased spending.
According to the New Zealand Institute for Economic Research The RBNZ’s shadow board was split on whether or not to raise rates before a decision was made. The majority of the Board of Governors were in favor of a 0.25% rate hike as inflation was still seen as high, along with domestic inflationary pressures also not abating. However, a minority of board members believe the correct course of action was to hold off on rate increases and keep the OCR at 5.25%.
One board member believed that interest rates should remain as they are because rate increases have yet to filter into the economy.
Another board member said that as consumers become increasingly wary of spending due to rate increases, the knock-on effect is declining business profitability.
This was mentioned in the RBNZ’s rate hike statement, which confirmed that growth in consumer spending had moderated, with businesses reporting slower demand for goods and services.
Investment plans for businesses also weakened along with activity in the area of residential construction.
Overall, the economy shrank by 0.6% in the three months to December last year, a regression from the two previous quarters, which saw growth of 1.7% and 1.9%.
- The New Zealand dollar predictably reacted negatively to the bank’s announcement of an end to rate hikes, with the kiwi falling against both the US dollar and the Japanese yen.
- The NZD/USD currency pair fell as low as $0.6116 after the RBNZ release.
- The benchmark NZX 50 share market index also fell to 11,870 before bouncing back to 11,971 later in the day.