Ten Latest Zealand dollars with coins.
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Latest Zealand’s central bank raised interest rates by 50 basis points to a more than 14-year high of 4.75% on Wednesday, and said it expects to maintain tightening further as inflation stays too high, a hawkish signal that sent the local dollar surging.
The Reserve Bank of Latest Zealand, or RBNZ, said it was too early to evaluate the policy implications of the recent devastating cyclone and floods within the country’s North Island, and expects to look past the short-term price pressures stemming from the “extreme weather events.”
The RBNZ continues to expect the official money rate (OCR) to peak at 5.5% in 2023, in keeping with the monetary policy statement accompanying the speed decision. That might mark essentially the most aggressive policy tightening streak because the official money rate was introduced in 1999.
“While there are early signs of price pressure easing, core consumer price inflation stays too high, employment remains to be beyond its maximum sustainable level, and near-term inflation expectations remain elevated,” the central bank said in an announcement.
The choice was largely in line with a Reuters poll.
The most recent policy statement from the RBNZ, which was among the many first global central banks to withdraw pandemic-era stimulus, suggests the bank is in less of a rush than a lot of its peers in shifting to smaller rate increases after a sweeping series of rapid-fire moves.
Inflation challenge
The Latest Zealand dollar rose as high as $0.6246 after the choice, reflecting the hawkish tone of the statement, having traded as little as $0.6206 earlier. It was last fetching $0.6238.
The 2-year swaps are currently at 5.26%, in comparison with 5.18% at start of day, and markets are actually pricing an OCR peak of 5.38% verses 5% two weeks ago.
“There was some speculation that the RBNZ would keep the OCR on hold in the interim,” ASB Chief Economist Nick Tuffley said in a note to clients.
“However the impacts of weather disasters will only make the RBNZ’s job of curbing inflation more difficult,” he said.
ASB expects one other 50-basis-point rate increase in April, and Tuffley noted there was some risk the RBNZ will do more over time.
Latest Zealand’s annual inflation is currently running near three-decade highs of seven.2%, well above the central bank’s medium term goal of 1%-3%.
Addressing a post-policy press conference, RBNZ Governor Adrian Orr said inflation is anticipated to hit 7.3% in the primary quarter before easing.
“The business cycle is such that inflation pressures are very strong and inflation is simply too high. So the direction of our official money rate was straightforward,” Orr added.
Weather conundrum
Flash floods hit Latest Zealand’s largest city of Auckland in late January and two weeks later Cyclone Gabrielle caused havoc across much of the North Islands. The 2 events left 15 people dead and have caused billions of dollars of injury.
While the rebuild will boost the economy and inflation — already a difficulty for the central bank — growth is about to slow within the short term.
“The Committee acknowledged the numerous regional impacts that the severe weather events may have across Latest Zealand, and agreed that the federal government’s fiscal policy response could be more effective at addressing these, moderately than any monetary policy activity,” the central bank said.
The RBNZ continues to expects Latest Zealand to slide right into a recession within the second quarter of this 12 months, but sees growth rebounding in the primary quarter of 2024, sooner than its previous forecast.
“Given the likely medium-term inflation impacts of the cyclone, we see the risks around our forecast 5.25% OCR peak as now tilted to the upside,” ANZ bank economist said in a note.
“Nonetheless, just like the RBNZ, we’re in wait-and-see mode until the image becomes clearer.”
