Helping hand: Defence force personnel deliver supplies to stranded families following Cyclone Gabrielle, in Rissington. The storm brought with more hardship for the people of the North Island, at a time when the central bank is battling o contain rising inflation. — AP
WELLINGTON: New Zealand’s central bank raised interest rates by half a percentage point, slowing its pace of tightening, but signalling further hikes will be needed to tame inflation.
The Reserve Bank of New Zealand’s (RBNZ) monetary policy committee lifted the official cash rate (OCR) to 4.75% from 4.25% yesterday in Wellington, as expected by 20 of 23 economists surveyed by Bloomberg.
The bank’s forecasts show the OCR peaking at 5.5% this year, unchanged from its previous projections though taking slightly longer to get there.
“While there are early signs of demand easing, it continues to outpace supply, as reflected in strong domestic inflation,” the RBNZ said in a statement. “The committee agreed that monetary conditions need to tighten further.”
Slower-than-expected inflation and a softening labour market had fuelled speculation that the RBNZ would refrain from repeating the jumbo 75 basis-point hike it delivered in November.
Indications that economic growth will take a near-term hit from the impacts of Cyclone Gabrielle also warrant a less-aggressive approach, although the potential inflationary impacts of the disaster still need to be assessed.
New Zealand is still responding to the shock of Cyclone Gabrielle, which destroyed infrastructure, flooded homes, and displaced thousands as it cut across the upper North Island last week.
Orchards and food-producing regions were devastated, suggesting near-term shortages and price spikes.
New Zealand’s Treasury Department said yesterday that the rebuilding of homes and infrastructure will add demand to an already capacity-constrained construction industry and lead to general, nationwide inflation pressure.
That could result in the RBNZ keeping interest rates higher for longer, it said.
The RBNZ said it’s too early to accurately assess the monetary policy implications of the storm.
The timing, size, and nature of the government’s financial response are also yet to be determined, it said.
The committee’s current assessment is that over the coming weeks, prices for some goods are likely to spike, activity will be weaker than previously expected, and export revenues will be negatively impacted.
“Monetary policy is set with a medium-term focus, and the committee will look through these short-term output variations and direct price effects,” the central bank said.
“In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.”
The RBNZ’s updated forecasts are little changed from those it presented in November.
They forecast the OCR rising to 5.5% in the fourth quarter of 2023 (it was previously in the third) and then gradually declining beginning in the third quarter of 2024.
The central bank reiterated that it expects a recession to start in the second quarter of this year, but the economy is seen bouncing back a little sooner next year.
Inflation will accelerate to 7.3% in the current quarter from 7.2% in the fourth quarter of 2022, the new projections show.
Inflation will be slightly firmer than previously expected through the second half of 2023 but return to the top of the central bank’s 15 to 3% target range by the third quarter of 2024, unchanged from the previous forecast.
The RBNZ’s switch to a more moderate OCR increase brings it closer to its global peers, who have slowed the pace of tightening as rate-sensitive sectors of their economies start to weaken. Still, the half-point move puts New Zealand at the upper end of recent increases.
The US Federal Reserve raised rates earlier this month by a quarter-point, slowing from a 50 basis-point hike in December and four consecutive 75-basis-point increases before that.
Australia’s central bank downshifted to quarter-point moves in October.
Howver, it turned hawkish in February after having considered a pause in December. — Bloomberg
