New Zealand central bank sharply raises rates, now expects to peak at 5.5% in 2023

The Reserve Bank of New Zealand raised interest rates aggressively on Wednesday in response to stubborn inflation pressures, ignoring recent signals from some its global peers that the pace of policy tightening could slow.

The RBNZ raised its official cash rate by 75 basis points to 4.25%, taking the pace of increases a step up from the 50-basis-point hike that took the rate to a seven-year high of 3.50% in early October.

The big surprise in the statement lay in the RBNZ’s projected path for the OCR, which it now expects will need to reach a peak of 5.5% next year compared to the peak of 4.1% forecast in August.

“The committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term,” RBNZ Gov. Adrian Orr said in a statement.

“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen,” he added.

The RBNZ also noted that it had considered delivering a 100-basis-point hike on Wednesday and is now forecasting a recession next year. It expects gross domestic product to fall 1% peak to trough in 2023, with four consecutive quarters of contraction.

“That appears to be what they now believe is unfortunately necessary to bring inflation down from what’s looking like regrettably sustained highs,” said Sharon Zollner, chief economist at ANZ in New Zealand.

The big rate increase follows news that inflation ran at 7.2% on year in the third quarter, well above what economists had expected. Wage growth is also accelerating in New Zealand, with the labor cost index up to 3.8% on year in the third quarter, compared with 3.4% in the second.

Both the Reserve Bank of Australia and the Bank of Canada have slowed the pace of policy tightening over recent months amid growing warnings about a rapidly slowing world economy, and fears that aggressive hikes could further topple house prices in both countries.

Questions are also being asked about what the U.S. Federal Reserve will do next after October inflation data came in well below expectations.

The RBNZ’s move comes despite signs of a rapid weakening in New Zealand house prices. Nationally, prices for homes were down 10.9% on year in October, and sales activity down 34.7%, according to the Real Estate Institute of New Zealand.

Economists say the RBNZ still needs to remain vigilant, given that the war on inflation is far from won.

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