New Zealand institutes record rate increase to tame inflation

New Zealand’s central bank has pushed its benchmark interest rate up by a record 0.75 percentage points, as it works to tame inflation even as other economies have signalled caution over monetary tightening.

The Reserve Bank of New Zealand said on Wednesday that further monetary tightening was required to bring inflation back within its target range after hitting 7.2 per cent in September, sparking a sell-off in sovereign bonds.

New Zealand’s two-year bond yield surged by 0.19 percentage points to about 4.6 per cent on Wednesday. Yields on the benchmark two-year paper have risen almost 2.5 percentage points this year.

The increase to 4.25 per cent — its highest level since 2008 and the biggest bump since the official cash rate’s introduction in 1999 — comes as other economies are scaling back monetary tightening. Analysts, however, say that the wage-price concerns flagged by the RBNZ are a warning to the world.

“New Zealand has been a very, very accurate canary in the coal mine for the emergence of inflationary pressures and the persistence of inflationary pressures,” said Sharon Zollner, chief economist at ANZ.

Federal Reserve officials in the US have in recent weeks backed a slowdown in the pace of interest rate increases as inflation eases. Consumer prices in the country rose 7.7 per cent year on year in October, the slowest increase since January.

The slowdown has boosted markets this month as investors bet that the Fed might soon shift from its hawkish policy.

The US has also released robust labour market data and Fed chair Jay Powell warned at the beginning of this month he did not “see the case for real softening yet”.

New Zealand’s recent inflation data is higher than expected, at a time when the country’s unemployment rate is close to a record low.

The bank forecast the New Zealand economy would contract around 1 per cent next year, adding tight labour conditions and a rebound in tourism would increase inflationary pressures.

Australia increased rates by 0.25 percentage points in each of its last two monetary policy meetings, despite criticism of the country’s central bank for delaying rises.

“I think globally nobody wants to believe the central banks are going to have to cause real pain to get inflation back down,” said Zollner. “But it’s worth noting that the slowdown in the US was one month . . . one swallow does not a summer make.”

Marcel Thieliant, economist at Capital Economics, said that the RBNZ’s projections signalled that the economy was “particularly overheated”.

“That said . . . the RBNZ’s difficulties in reining in price pressures despite slumping house prices coupled with the huge acceleration in wage growth should serve as a warning sign to central banks elsewhere.”

Additional reporting by Hudson Lockett in Hong Kong

Video: NZ housing: a canary in the coalmine? | FT Transact