New Zealand hikes rates for first time in seven years, more to come

WELLINGTON (Reuters) – New Zealand’s central bank raised interest rates on Wednesday for the first time in seven years and announced further tightening ahead, as it seeks to weather inflationary pressures and cool a boiling real estate market.

FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand in central Wellington, New Zealand July 3, 2017. REUTERS / David Gray / File Photo

The 25 basis point rate hike marks the start of a tightening cycle that was supposed to start in August, but was delayed after an outbreak of the Delta coronavirus variant and an ongoing lockdown in its largest city, Auckland .

The Reserve Bank of New Zealand’s (RBNZ) spot rate hike to 0.50% was predicted by all 20 economists polled by Reuters.

The New Zealand dollar rose briefly after the announcement, but fell back to $ 0.6930, in line with broader market movements.

“It was pretty much in line with what everyone was choosing,” said Jason Wong, senior market strategist at BNZ in Wellington. “We are on the way to a series of rate hikes and the market is well paying for it.”

Announcing its decision, the RBNZ said further removal of monetary policy stimulus was expected, with future measures hinging on the medium-term outlook for inflation and employment.

The rate hike puts New Zealand ahead of most other developed economy countries as central banks seek to cut emergency borrowing costs, although countries like Norway here, the Czech Republic here and South Korea here have already raised their rates.

In neighboring Australia, the central bank kept interest rates at an all-time high of 0.1% for the 11th consecutive month on Tuesday.

Economists expect the benchmark rate to reach 1.50% by the end of next year and 1.75% by the end of 2023, according to the Reuters poll.

CAPACITY STRAINS

The South Pacific nation has experienced a rapid economic recovery from a COVID recession last year, in part because it wiped out the coronavirus and reopened its economy before others.

But with its borders still closed, labor and asset shortages are driving inflation up, while also contributing to a booming real estate market, spurred by ultra-low interest rates.

“Demand deficits are less of a problem than the economy hitting capacity constraints …” the RBNZ committee noted in the meeting minutes.

The central bank said headline CPI inflation is expected to rise above 4% in the near term but return to its mid-point of 2% in the medium term.

Recent restrictions related to COVID-19 have not significantly changed the outlook for inflation and employment over the medium term, and economic activity will recover quickly when measures are relaxed, he added.

But economists have said the RBNZ may not accelerate its hiking cycle given the current global uncertainty and the prolonged Delta variant outbreak in Auckland.

“(We) remain of the view that further rate hikes will be in 25 basis point increments rather than 50 basis points,” Citibank economist Josh Williamson said.

New Zealand abandoned its COVID-19 elimination strategy this week, with the government saying it will have to live with the virus and increase vaccination rates to bring it under control.

In August, a central bank official confirmed that he had also considered a 50 basis point move this month, before fully withdrawing a rate hike due to the foreclosure.

Additional reporting by Tom Westbrook in Singapore; Editing by Richard Pullin


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