WELLINGTON, New Zealand — New Zealand’s central bank raised its benchmark interest rate by 50 basis points, accelerating the withdrawal of pandemic-era monetary stimulus after inflation hit a multi-decade high.
It was the Reserve Bank of New Zealand’s fourth consecutive rate hike after hikes of 25 basis points at each of its meetings in October, November and February. Wednesday’s increase took the cash rate to 1.5% from 1.0%.
“Moving the OCR (Official Cash Rate) to a more neutral stance sooner will reduce the risks of rising inflation expectations,” the RBNZ said.
“A larger move now also offers more policy flexibility in light of the highly uncertain global economic environment,” he said.
The RBNZ, which helped boost inflation with sweeping stimulus during the Covid-19 pandemic, is now trying to prevent rapid increases in consumer goods prices from becoming entrenched.
But it also risks causing a sharp downturn in the economy which is already facing headwinds from low business and consumer confidence, China’s zero Covid-19 policy and Russia’s war on Ukraine.
Central banks in many other countries are also grappling with the same challenges after rapidly increasing the supply of fiat money in response to the first global pandemic since 1968. Policymakers expected public health restrictions such that lockdowns drastically reduce demand and income, although this has been the case. often mitigated by government support measures, while disruptions in global production and shipping have created a new inflationary impulse.
The RBNZ cut its cash rate to a record low of 0.25% at the start of the pandemic, and alongside an increase in public spending equal to 20% of New Zealand’s gross domestic product and chain disruptions global supply chain, pushed the country’s inflation rate to its highest in three decades.
The RBNZ’s last set of comprehensive forecasts in February predicted that the cash rate would reach around 3.3% by the end of 2023. The RBNZ will release new forecasts at its May 25 meeting.
Economists at ANZ, one of New Zealand’s major banks, had called for increases of 50 basis points at the April and May RBNZ meetings. Interest rate markets had priced in a strong probability of a 50 basis point hike on Wednesday.
Consumer prices in New Zealand jumped 5.9% year-on-year in the October-December quarter last year, from 4.9% in the previous quarter. The central bank aims to keep inflation within a range of 1.0% to 3.0% over the medium term.