The Reserve Bank of New Zealand hiked its Official Cash Rate as expected by 0.25%, but also made clear that this would be the last hike in the current cycle, which was a surprise.
Since August 2021 there have been 12 consecutive rises in the cost of borrowing, at the start rates were just 0.25%, and the latest move by the RNBZ will echo the sentiment that it’s one of the most hawkish central banks in the world.
In a statement released by the Bank, an excerpt read “The Committee agreed the level of interest rates are constraining spending and inflation pressure.” The Bank also said that the Official Cash Rate (OCR) will need to remain at a “restrictive level for the foreseeable future,” if the rate of inflation is to be reversed back to the government’s target of between 1% and 3%.
Official figures have revealed that annualized inflation in New Zealand declined to 6.7% for the first quarter of this year, from 7.2% for the final quarter of last year.
The rise in prices peaked in the second quarter of last year at 7.3%.
The RBNZ anticipated that inflation would continue to fall from its peak, and eventually meet its inflation target.
However, it is expected that core inflationary pressures are here to stay until capacity constraints ease in the future.
There are signs that New Zealand’s tight labor market is beginning to ease, even though employment is above its maximum sustainable level, as there are signals that labor shortages are tailing off and that more vacancies are being filled.
Net migration has returned after the reopening of international borders, which were closed due to Covid-19. Over the coming quarters it’s expected to reach pre-pandemic levels. This has helped with the problems created by labor shortages, but it is uncertain up to now just how much increased migration is contributing to overall spending.
There is evidence that the tourism sector has recovered, with activity in the sector now three quarters of what it was before the pandemic and is a significant factor in supporting domestic demand with the increased spending.
Shadow Board Split, Analysts Proven Right
According to the New Zealand Institute of Economic Research, the Shadow Board of the RBNZ was divided over whether to raise rates or not before the decision was made. A majority of the board was in favor of the 0.25% increase in rates as inflation was still deemed high, alongside that domestic inflationary pressures were also not weakening. However, a smaller number of board members believe that the right course of action was to pause rate rises and keep the OCR at 5.25%.
One board member felt that interest rates should remain as they are, as the rate increases had yet to filter way to the economy.
It was voiced by another board member that as consumers are becoming increasingly wary of spending due to the rate rises, the knock-on effect was declining business profitability.
This was mentioned in the RBNZ rate rise statement, which confirmed that consumer spending growth had eased, with businesses reporting back slower demand for goods and services.
Investment intensions for businesses have also weakened, alongside residential construction activity.
Overall, the economy contracted by 0.6% in the three months to December last year, a regression from the two previous quarters which saw growth of 1.7% and 1.9% respectively.
New Zealand Dollar Falls While Stocks Seesaw
- The New Zealand Dollar predictably reacted negatively to the Bank’s announcement it is finished hiking rates, with the Kiwi falling against both the US Dollar and the Japanese Yen.
- The NZD/USD currency pair fell as low as $0.6116 following the RBNZ’s release.
- The benchmark NZX 50 stock market index also fell to 11,870, before bouncing back to 11,971 later in the day.