The central bank of New Zealand delivered its sixth consecutive hike in the country’s interest rate on Wednesday. In fact, the bank also signaled that it was quite comfortable with the aggressive monetary policy tightening path that it has chosen in order to combat the runaway inflation in the country.
Interest rate rises
On Wednesday, the Reserve Bank of New Zealand raised its interest rate to 2.5%, which is a hike of 50 basis points, a level that it was last seen at in March 2016. The bank further asserted that it would continue to tighten its policy for ensuring price stability in the country and sustainable employment as well.
Even though it had been expected that the central bank in New Zealand would increase the interest rate by 50 basis points, there had been speculation that its hawkish stance might soften a bit. This was in light of the alarming declines seen in consumer and business confidence in the country and the sharp decline in house prices as well.
However, the central bank said on Wednesday that its policy committee was ready to lift the official cash rate (OCR) briskly until they are confident that they can control inflation and also bring down consumer prices within their target range. But, the committee also acknowledged that there was a risk of up-side where consumer prices were concerned and economic activity could also slow down.
The RBNZ had been one of the frontrunners when it came to withdrawing stimulus from the economy issued during the pandemic. It had adopted a hawkish stance for taming inflation that had reached 6.9% in the first quarter of the year. This was the highest rate of inflation in about 30 years.
In the second quarter, the central bank has forecast an inflation rate of 7%, which is higher than its 1% and 3% target. The price data for the second quarter is due the next week and it will show if it is within the forecast, or has exceeded. If the figures turn out to be surprisingly strong, they are going to impact the future rate increases of the New Zealand central bank.
However, it should be noted that the decisions that the RBNZ has to make in the second half of the year are going to get harder. This is because there is increasing evidence that tightening financial conditions is definitely affecting demand and will eventually affect inflation as well.
The question about how much is too much is going to get a lot louder. It is expected that the central bank will hike the interest rates by another 50 basis points in August. However, expectations are growing that the bank will slow down after that.
Analysts have already predicted that after this 50 basis points hike, the bank is likely to increase the rate by 25 basis points, as this would reflect the slowdown in economic growth that will become more prominent in the next few months.