Reserve Bank of New Zealand hikes interest rates

On Wednesday, New Zealand’s central bank said, it has hiked interest rates for the first time in seven years while signalling further tightening in the coming days in an effort to cool inflationary pressures.

The 25 basis point rate hike by the Reserve Bank of New Zealand marks the start of a tightening cycle that was expected since August, but was delayed following the outbreak of the Delta variant of the coronavirus.

The New Zealand dollar briefly rose after the announcement but fell back to $0.6930, in line with broader market moves, as the hike was expected by traders.

“The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment,” said the RBNZ.

New Zealand’s interest rate hike puts it ahead of most other developed economies with central banks looking to wind down a liberal fiscal policy. Countries including Czech Republic, Norway, and South Korea have already raised interest rates.

“It was pretty much in line with what everyone was picking,” said Jason Wong, senior market strategist at BNZ in Wellington.”What they were forecasting still remains valid, which means we’re on a path towards a series of rate hikes and the market is well priced for that”.

New Zealand has enjoyed a strong economic recovery partly because to a great extent t has eliminated coronavirus and reopened its economy before others. However, since it has yet to open its borders, the shortage of labour and goods are pushing up prices and contributing to inflation and a surging property market, driven by ultra-low interest rates.

“Demand shortfalls are less of an issue than the economy hitting capacity constraints…,” noted the RBNZ’s Committee in the minutes of a meeting. In a statement the RBNZ said, CPI inflation is expected to increase above 4% in the near-term but return towards its 2% midpoint over the medium term. It went on to add, it does not expect any material impact to inflation from the recent COVID-19 related lockdowns and it expects employment, and economic activity to recover relatively quickly once the measures are eased.

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