On Wednesday, the central bank of New Zealand delivered its seventh consecutive increase in interest rates.
In addition, the monetary authority also signaled that it would continue to maintain a hawkish stance in terms of monetary policy tightening in the next few months in order to control inflation.
Rate hike
Some traders were taken by surprise by the aggressive tone used in the statement of the Reserve Bank of New Zealand (RBNZ).
The warning about bringing forward some future interest rate hikes ended up boosting swap rates and also gave the local dollar a boost.
As expected, the central bank of New Zealand increased its official cash rate (OCR) to 3.0%, which marked an increase of 50 basis points.
This level had last been seen in September of 2015 and now it is expected that rates will climb to 4.0% in the beginning of next year, as opposed to a previous projection of 3.7%.
Wednesday’s increase in interest rate by 50 basis points was the fourth consecutive increase, along with a few smaller increases that had been made earlier.
This saw the cash rate climb from an abnormal low in October of 0.25%. It also marks the most aggressive tightening of monetary policy by the RNBZ since 1999.
The central bank stated that there had been an increase in the domestic inflationary pressures since May, due to which they decided to bring forward the time of OCR hikes.
Market reactions
Analysts said that the statement of New Zealand’s central bank had been appropriately hawkish and indicated that pressure was needed on the demand in the economy.
Therefore, an adjustment had been seen in the OCR for this tightening cycle from 3.5% previously to 4%. Markets did not take long to price in the aggressive outlook.
There was a 13 ticks decline in bank bill futures to 95.76 for March, while a 6 basis points increase was recorded in two-year swap rates.
There was a 0.6% rise in the New Zealand dollar before it trimmed gains and was last trading at a value of $0.6311.
Market analysts said that banks appeared to be more worried about the labor market because it is too tight, while inflation remains too high.
Cost pressures
While predictions had been on the mark about the central bank increased the interest rates by 50 basis points, there had been disagreements about where the rates would reach their peak and if they would be cut in the next year.
In the second quarter, inflation in New Zealand had reached 3.7%, which is the highest in three decades, even though the RNBZ had been one of the first banks to withdraw the stimulus in the pandemic era.
The central bank stated that Committee members were in agreement about a persistent tightening in the monetary conditions until they believe inflation can come down between the 1% and 3% range.
House prices have contributed to inflation and the central bank expects them to fall by 20% by the middle of next year.