Another hike of interest rate by NZ central bank corresponds with further monetary tightening

Although the Reserve Bank of New Zealand's (RBNZ) has been taking confident actions to withdraw stimulus left from the pandemic period, the inflation is still at high levels in New Zealand. It rose above 7% in the second quarter, which is the highest point reached in the last three decades.

To regulate and manage the situation, it was decided by the RBNZ to raise the interest rate again, and the decision was announced on Wednesday together with a statement concerning the subsequent tightening of the monetary policy.

The current hike of the interest rate is already the seventh in a row, and it’s the fourth successive 50-bps hike. Such actions have led to significant increasing of the interest rate, especially in comparison with its October levels of 0.25%, which was the record low. As a result of recent raising, the interest rate has reached the previously forecasted level of 3.0%.

This level of the interest rate hasn’t been observed in seven years, and the bank expects the next level to be at 4.0%, which might be reached by January. The RBNZ has also announced the raising of the projected peak for the cash rate to 4.1%, where it is expected to stay until 2024.

The predicted level turned out to be higher than the previously announced one, which was said to be possibly reaching 3.7%. Considering all the available data and the latest statements, the following tightening of policy will be the most aggressive one in 23 years.

The RBNZ representatives have emphasized the importance and necessity of such actions to support the local economy, keep the prices, and avoid destabilization in the labor market. They have announced their intent to keep pursuing such policy until it’s possible to keep the inflation in a 1–3% range during a year. The RBNZ has clearly outlined inflation curbing as its main objective, even at the cost of slowing down the economy.

Such statements from the RBNZ were regarded as hawkish, and the market reaction was corresponding. The NZ dollar has grown against the US dollar by 0.4% to 0.6360. The swap rates have also increased. Imre Speizer of Westpac assessed the bank actions and statements as aggressive in many aspects.