The Central Bank of New Zealand raised interest rates as anticipated on Wednesday and declared that persistent inflation will cause rates to stay higher for longer. Even though financial tightening is likely to have a negative impact on local economic growth.
As anticipated by most analysts, the RBNZ increased its official cash rates (OCR) by twenty-five basis points (bps) to 5.5%. After a cumulative 525 bps rate increase by the bank since mid-2021. The move raises the OCR to its greatest level since the financial crisis of 2008.
The RBNZ acknowledged that its rate increase cycle was limiting expenditure and inflation stress. But it also anticipates interest rates will stay higher for a longer period of time in order to keep inflation in consumer prices within its target range of 1% to 3%.
The primary quarter of 2023 saw annual consumer inflation of 6.7 percent, more than above the bank’s goal range. However, it was also less than a high of nearly 7 percent reached in the Dec quarter.
After Wednesday’s decision. The New Zealand currency fell 1% because the RBNZ meeting minutes revealed that the central bank had also discussed delaying future rate increases in order to monitor the effects of restrictive financial policy on the economic.
The RBNZ increased interest rates by a larger-than-anticipated 50 basis points in April, citing elevated inflationary pressures. Which led to Wednesday’s action. But the central bank had then hinted at a more data-driven strategy for continuing to raise rates.
However, the RBNZ also issued a warning that the pace of economic development was expected to decrease in the ensuing quarters, with consumption and spending already slowing in rate-sensitive industries.
As growth in the nation’s two main trading partners, Australia and China, slows. It is anticipate that weak global economic conditions would further hamper the New Zealand economy.
However, the RBNZ noted that some aspects of the economy continue to be robust. Following the relaxation of anti-COVID restrictions last year, the tourism industry has started to rebound, and attempts to rebuild following Cyclone Gabrielle, one of the greatest storms to batter the country in more than 50 years, will further spur growth.
The labour market in New Zealand is still very tight, with demand far surpassing supply. The RBNZ stated that while the trend is anticipate to assist economic growth over the next several months. It is also anticipated to change as monetary conditions tighten.