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RBNZ pursues path of 'least regret', lifting rates by 50bp

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New Zealand’s central bank has raised rates by 50 basis points.

New Zealand’s Reserve Bank (RBNZ) raised the official cash rate to 1.5 per cent on Wednesday, in a bid to contain inflationary pressures.

The committee agreed it is appropriate to act quickly, confirming its policy path of “least regret” is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future.

It said it remained comfortable with the outlook for the OCR as outlined in their February Monetary Policy Statement.

According to the RBNZ, a larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment.

“The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing supply disruptions in large part driven by COVID-19,” the RBNZ said.

It clarified that the Russian invasion of Ukraine has significantly added to these supply disruptions, causing prices to spike in internationally traded commodities and energy.

RBNZ expects annual consumer price inflation to peak around 7 percent in the first half of 2022, well above its 1 to 3 percent target range.

New Zealand reported CPI growth of 5.9 per cent for the last three months of 2021, the fastest rate since mid-1990.

In delivering its April decision, RBNZ took heed of the slowing pace of global economic activity, noting elevated level of uncertainty created by the persistent impacts of COVID-19, and clear signals that monetary and broader financial conditions will tighten over the course of 2022.

Added to this is the high level of geopolitical tension and related economic sanctions on Russia.

Acknowledging above target inflation and employment, the committee conceded that further increases in the OCR are needed.

NZ major banks are predicting interest rates to surpass 2 per cent by the end of the year, with the RBNZ itself projecting a rise to over 3 per cent by 2024.

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.