The Reserve Bank of New Zealand on Wednesday raised interest rates by 25 basis points to 0.75% to eliminate the overheating economy and control soaring house prices.
The Central Bank of New Zealand’s aggressive interest rate hikes will be closely watched by central banks around the world as they are considering how to respond Rising global prices.
The Central Bank of New Zealand believes that the level of neutral interest rates — monetary policy will neither stimulate nor restrict the economy — is about 2%. Its new forecast indicates that by December 2023, interest rates will have to rise to 2.6%, compared with the 2.1% forecast in August.
This shows that the bank believes that the economy will overheat for a period of time, and it will have to use restrictive policies to get inflation back on track.
New Zealand’s capacity pressure has become more severe. The Bank of New Zealand predicts that the consumer price index will rise above 5% in the near term, and then return to the midpoint of the target range of 2% by the end of 2023.
The Bank of New Zealand is unusual among its peers because inflation and employment are at or above the target level, which puts pressure on the central bank to reduce monetary stimulus measures.
The Bank of New Zealand judged that the impact of rising oil prices, rising transportation costs, and supply shortages have exacerbated the recent rise in inflation. It pointed out that given domestic capacity constraints, these shocks may lead to broader price increases.
At the board meeting, the Bank of New Zealand discussed the reasons for further interest rate hikes due to pressures on production capacity, a high inflation starting point, and the risk that inflation will be embedded in price setting behavior in the near future.
But it chose not to do so because of uncertainty about the resilience of consumer spending and business investment as New Zealand adapts to coexisting with the Covid-19 virus.Until recently, Wellington was still pursuing Zero coronavirus policy.
Another reason is that as banks raise interest rates for households and businesses, monetary conditions have tightened.
The Bank of New Zealand discussed the stimulus provided by the lingering effects of its asset purchase program and said it expects to reduce its bond holdings. It will provide detailed information early next year.
The Bank of New Zealand stated in its forward guidance: “In view of the medium-term outlook for inflation and employment, it is expected to further cancel monetary policy stimulus measures over time.”