New Zealand ends ultra-low interest rates, signals more hikes

WELLINGTON (REUTERS) – New Zealand’s central bank on Wednesday (Oct 6) hiked interest rates for the first time in seven years and signalled further tightening to come, as it looks to get on top of inflationary pressures and cool its red-hot housing market.

The 25 basis point rate hike marks the start of a tightening cycle that had been expected to begin in August, but was delayed after an outbreak of the Delta variant of the coronavirus and a Covid-19 lockdown that is continuing in its biggest city Auckland.

The increase in the cash rate to 0.5 per cent by the Reserve Bank of New Zealand (RBNZ) had been forecast by all 20 economists polled by Reuters.

The New Zealand dollar briefly rose after the announcement but fell back to US$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,” RBNZ said in announcing its decision.

The rate hike puts New Zealand ahead of most other developed economies as central banks look to wind back emergency-level borrowing costs, although countries, including Norway, the Czech Republic and South Korea, have already raised rates.

In neighbouring Australia, the central bank held interest rates at a record low 0.1 per cent for the 11th straight month on Tuesday.

Economists expect the benchmark rate to reach 1.5 per cent by the end of next year and 1.75 per cent by the end of 2023, the Reuters poll showed.

New Zealand has enjoyed a rapid economic recovery since a pandemic-driven recession last year, partly because it eliminated coronavirus infections and reopened its economy before others.

But with its borders still shut, labour and goods shortages are pushing up inflation, as well as contributing to a surging property market, which has been driven by ultra-low interest rates.

“Demand shortfalls are less of an issue than the economy hitting capacity constraints,” RBNZ noted in the minutes of its meeting.

The central bank said headline consumer price index inflation is expected to increase above 4 per cent in the near term but return towards its 2 per cent midpoint over the medium term.

Recent Covid-19 restrictions have not materially changed the medium-term outlook for inflation and employment, and economic activity will recover quickly when the measures are eased, it added.

New Zealand had stayed largely virus-free until an outbreak of the highly infectious Delta strain in August led to a snap lockdown. While Auckland remains in lockdown, the government said this week it will shift from its zero-Covid-19 strategy.

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