New Zealand gears up for fifth 0.5% rate hike

The Reserve Bank of New Zealand (RBNZ) said it is ready for a fifth consecutive interest rate hike by 50 basis points. Economists predict a further monetary tightening by 2023, as the central bank's aggressive measures contribute to the New Zealand dollar weakening.

As Bloomberg notes, 20 of the 22 economists surveyed are leaning toward a 0.5% rise in the Official Cash Rate (OCR), reaching 3.5%. The statement is likely to be released on Wednesday in Wellington. A majority of experts are predicting another 50 basis point hike at the next regulator's meeting scheduled for November. Economists are also mentioning a possible rate increase to 4.5% or higher in 2023.

The RBNZ has been in the lead to raise its interest rates. However, the U.S. Federal Reserve (Fed) narrowed the gap with three consecutive hikes of 75 basis points. These measures caused the U.S. dollar to grow in relation to other currencies. A 6.3% fall in the New Zealand dollar reaching its 13-year low last month, could boost inflation and push up the cost of imports.

"Spreading cross-country inflation won’t stop as quickly as we expected," noted Michael Gordon, acting chief economist at Westpac Banking Corp. in Auckland. Last week, Gordon revised his OCR forecast, saying rates to peak at 4.5% by next year. 

Central banks around the globe continue to mention the need for further rate hikes in order to regain control over inflation. In September, the Fed projected the U.S. benchmark federal funds rate would reach 4.6% in 2023, up from its current point of 3-3.25%. However, economists and investors are now caught off guard by the RBNZ’s decision to raise rates by 25 basis points instead of the 50 widely expected. 

The OCR is likely to rise to 4% in early 2023, according to the RBNZ's August forecast. This tightening would be enough to return inflation to the 1-3% target by 2024. 

New Zealand's tight labor market, along with the country's gradual recovery from the pandemic, reinforce the need for further increases in the borrowing costs. Unemployment rate reached 3.3% in the second quarter. Meanwhile, economic growth was unexpectedly high at 1.7%.

Falling real estate prices, as well as declining business confidence didn’t contribute to softening inflationary expectations for the next year. Thus, the figures are ranging around 6%. 

According to a survey by the Economic Research Institute of New Zealand, about two-thirds of companies expect prices to spike in the fourth quarter, although the economic outlook deteriorates. 

Some experts also warn of a likely slowdown in global economic growth due to continuing rate hikes. Ultimately, these moves may become a greater threat than soaring inflation.

“It has been years since the world witnessed a one-time monetary tightening in different countries,” said Stephen Toplis, head of research at the Central Bank of New Zealand in Wellington. OCR is expected to peak at 4.25%, he said. “Pressures on global inflation should ease in the medium term. The RBNZ cannot ignore this fact.”