New Zealand interest rate hike puts pressure on central banks on inflation

New Zealand’s central bank has raised interest rates to 0.75% for the second time in as many months, with many forecasters expecting borrowing costs to rise to at least 2% and possibly higher by next year.

In a warning sign to central banks around the world as they struggle to contain inflationary pressures, the Reserve Bank of New Zealand (RBNZ) raised the official cash rate by 25 basis points to 0.75%, as expected at its last policy meeting of the year. Wednesday.

RBNZ said further relaxation of incentives may be needed. “The committee expected that the rate would need to be increased progressively and that the rate would need to be raised above its neutral rate, as the economy develops as expected,” the minutes of the meeting said.

Its forecasts indicated a more aggressive tightening cycle, reaching 2.5% by 2023 and higher by December 2024, and many independent economists agreed.

“Given the heat in the economy, we think the RBNZ is far from over,” said Capital economist Ben Udi. Economics, “We expect the bank to continue raising rates to around 2.0% next year by the middle of next year.”

Michael Gordon, acting chief economist for Westpac Bank in Australia, said he thought the RBNZ could raise rates by 0.5% when they meet in February.

“We continue to expect a series of increases in the coming policy meetings, and we anticipate reaching a peak OCR of 3% in the third quarter of 2023.”

The decision of the RBNZ, which began its so-called tightening cycle by raising rates by 0.25% in October, sets the stage for other central banks to follow suit.

Earlier this month, the US Federal Reserve was under increased pressure to raise rates when inflation data came out in October. reached a 30-year high of 6.2%, driven by rising energy costs and shortages across the economy in the wake of the post-pandemic disorganization of supply chains.

Although the Fed believes inflation is “temporary” and has directed markets not to raise rates until the end of next year, there is growing expectation that it will be largely But a more rapid withdrawal of post-pandemic monetary stimulus could assuage investor concerns. than planned when met on December 14-15.

Inflation is a global problem and the UK is not far behind the US with inflation rates 4.2% in October, The Bank of England had earlier moved closer to raising rates in November. she is a close memory Most forecasters are certain that the Monetary Policy Committee will act When it meets on December 16th. The same day the European Central Bank’s policy-making committee meets.

As with large economies, New Zealand has used a massive amount of fiscal and monetary stimulus to ease the pain of the pandemic and help the economy recover strongly. This in turn has pushed inflation to its highest and the unemployment rate to its lowest level in a decade. Annual inflation hit 4.9% in the third quarter, the fastest pace in more than a decade, while the unemployment rate fell to 3.4%, the lowest on record since December 2007.

Meanwhile, home prices have more than doubled in the past seven years and are Least affordable among OECD countries.

These pressures prompted the RBNZ to increase rates in October and be more stringent. The country is set to end the lockdown from December 3 and go into living arrangements with the virus, allowing all businesses to resume operations.