Written by James Glenn
The Reserve Bank of New Zealand aggressively raised interest rates on Wednesday in response to stubborn inflation pressures, shrugging off recent signs from some global peers that the pace of policy tightening may slow.
The Reserve Bank of New Zealand raised the official cash rate by 75 basis points, to 4.25%. The rally is a move up from the 50 basis point increase in early October that lifted the price to a seven-year high of 3.50%.
“The Committee agreed that the OCR needed to reach a higher level, and sooner than previously indicated, to ensure that inflation returns to its target range over the medium term,” RBNZ Governor Adrian Orr said in a statement.
He added, “Core consumer inflation is very high, employment is above its sustainable maximum, and near-term inflation expectations are up.”
The sharp increase in interest rates follows news that inflation reached 7.2% year-on-year in the third quarter, much higher than economists had expected. Wage growth in New Zealand is also accelerating, with the labor cost index rising to 3.8% year-on-year in the third quarter, compared to 3.4% in the second quarter.
Both the Reserve Bank of Australia and the Bank of Canada have slowed the pace of policy tightening in recent months amid mounting warnings about a rapidly slowing global economy, and fears that aggressive increases could lead to a further collapse in house prices in both countries.
Questions are also being asked about what the US Federal Reserve will do after inflation data for October came in well below expectations.
The RBNZ’s move comes despite signs of rapid weakness in New Zealand house prices. Nationwide, house prices fell 10.9% year-on-year in October, and sales activity fell 34.7%, according to the Real Estate Institute of New Zealand.
Economists say the RBNZ still needs to remain vigilant, given the war on inflation is a long way off.
Jarrod Kerr said: “The RBNZ must remain hawkish in trying to temper inflation expectations. The war on inflation continues. Although we are likely to see a peak in price hikes, the path back to price stability is frustratingly awkward.” Chief Economist at Kiwibank.
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