New Zealand official cash rate hiked by 0.5% for the fifth time in a row

Expectations of an increase of the New Zealand official cash rate have come true. On Wednesday, the Reserve Bank of New Zealand (RBNZ) raised it to 3.5%, which brought raises in the New Zealand dollar and bond yields.

Before raising the rate by 0.5%, a proposal to raise it by 0.75% was also considered, as it was assumed that such a sharp increase would now allow not to raise the rate in the future.

ASB Bank chief economist Nick Tuffley doesn’t rule out the possibility that the RBNZ could raise the rate by 50 basis points next month, and by the beginning of next year the rate has every chance of rising to 4.25%. Such actions show New Zealand's decisive attitude towards inflation (the highest in 32 years), in contrast to Australia. Australia raised the rate by only 0.5%, which caused great surprise.

After the meeting, the RBNZ Committee supported tighter monetary conditions, citing a high level of core consumer price inflation.

Although the Reserve Bank of New Zealand was one of the first to pursue tight policies, the Fed almost immediately caught up with it, raising the rate by 75 basis points. This action helped to strengthen the American dollar and hit not only the New Zealand dollar, but also other currencies.

The RBNZ, commenting on the events, said that inflation is capable of rising even more if the New Zealand dollar exchange rate remains as low.

The bank didn’t mention its own August forecast of a rate hike to 4.1% by 2023. At the same time, there is reason to believe that the official cash rate will continue to rise next year. For example, ANZ Bank New Zealand predicts a rise to 4.75%. Michael Gordon expects that the rate will exceed the RBNZ's August forecasts and rise to 4.5% by February.

At this point, the RBNZ, given the rate hike of 3.25%, needs to balance economic activity and the risk of new inflationary pressures. Meanwhile, the property market has already faced pressure. Housing prices have fallen substantially for the second time in the last quarter, and businesses are unhappy with the state of the economy and their own profits.

Bloomberg economist James McIntyre believes that since the RBNZ has not fully adapted to the risks of global growth, the bank won’t abandon rate hikes, but will reduce the level of hikes.