New Zealand’s central bank lifted its key interest rate by half a percentage point, the biggest increase in over two decades, to head off rising inflation expectations and minimize any unnecessary volatility in the future.
The Monetary Policy Committee of the Reserve Bank of New Zealand raised the Official Cash Rate by 50 basis points to 1.50 percent at its meeting on Wednesday. The bank hiked the rate for a fourth policy session in a row.
The latest hike was the biggest since May 2000, when the OCR was raised by a similar volume.
The previous change was a quarter-point hike in February.
The MPC agreed it is appropriate to continue to tighten monetary conditions at the current pace to best maintain price stability and support maximum sustainable employment.
“The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimize any unnecessary volatility in output, interest rates, and the exchange rate in the future,” the bank said.
“The Committee agreed to a 50 basis point rise in the OCR, consistent with this least regrets analysis,” the bank added.
Members observed that moving the interest rate to a more neutral stance sooner will reduce the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment.
Further, the committee noted that heightened global economic uncertainty and inflation are dampening consumer confidence. The rise in mortgage interest rates, amongst other factors, have acted to reduce mortgage demand and house prices.
However, economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures, the committee said.
The committee viewed that house prices are moving towards a more sustainable level.
Today’s RBNZ decision to accelerate its hiking cycle shows it is willing to move decisively to get a hand on surging inflation, Ben Udy, an economist at Capital Economics, said. The economist expects the rate to rise to 3.0 percent by the end of this year.
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