New Zealand Raises Rates Again as Price Pressures Mount
(Bloomberg) -- New Zealand’s central bank raised interest rates for the second time in two months and signaled it will need to tighten policy more quickly than previously expected to contain inflation.
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The Reserve Bank’s Monetary Policy Committee lifted the official cash rate by a quarter percentage point to 0.75% Wednesday, as expected by most economists. New forecasts published by the RBNZ show the cash rate rising to 2% by the end of 2022, a year sooner than projected just three months ago.
“Capacity pressures have continued to tighten” and “employment is now above its maximum sustainable level,” the RBNZ said. “A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.”
The RBNZ is at the forefront of global stimulus withdrawal as policy makers start to move away from the view that faster inflation caused by supply chain disruptions during the pandemic is transitory. Yet the kiwi and bond yields fell as some traders had wagered on a more aggressive 50 basis-point hike.
In New Zealand, price pressures are becoming more broad-based and persistent as a labor shortage begins to drive up wages.
The kiwi slipped 0.3% to 69.28 U.S. cents, the lowest in about six weeks, after the decision disappointed traders betting on a hike to 1%. Two-year sovereign bond yields slumped 14 basis points to 1.96% while 10-year yields retreated as much as 11 basis points, the most since March, to 2.50%.
The RBNZ now expects to raise its benchmark rate to 2.5% by the third quarter of 2023, its new forecasts show. Previously, it projected the cash rate plateauing at around 2% from late 2023.
New Zealand’s job market is as tight as it’s ever been, with the unemployment rate of 3.4% matching a record low, while inflation at 4.9% is well above the RBNZ’s 1-3% target and forecast to accelerate further.
The bank now projects inflation running at 5.7% this quarter and next before it gradually eases back toward 2% over the next two years.
“The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls,” the RBNZ said. “These immediate relative price shocks risk generating more generalized price rises given the current domestic capacity constraints.”
At the same time, there’s uncertainty around the economic outlook. Kiwis are bracing for Covid-19 to spread across the country when Auckland comes out of lockdown and a border around the city lifts next month.
“With the easing of restrictions, it is anticipated that the Covid-19 virus will become more widespread geographically, albeit manageable for health authorities and less harmful for those vaccinated,” the RBNZ said. “However, household spending and business investment will be dampened in the near-term by these ongoing health uncertainties.”
The central bank estimates the economy contracted 7% in the third quarter from the second due to Auckland’s lockdown and restrictions in other affected parts of the country. However, it expects economic growth to bounce back in the current quarter and to continue at a healthy clip next year.
“Underlying economic strength remains supported by aggregate household and business balance sheet strength, fiscal policy support, and strong export returns,” the RBNZ said. “Further removal of monetary policy stimulus is expected over time given the medium term outlook for inflation and employment.”
(Updates with further RBNZ comments throughout.)
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