WELLINGTON: New Zealand's central bank raised interest rates for the first time in more than three years on Wednesday and signalled further tightening ahead, saying it must do more to bring inflation back to target even as the economic recovery remains fragile.
The Reserve Bank of New Zealand lifted the official cash rate by 25 basis points to 2.50% in a unanimous decision, underscoring concern that inflation pressures will remain elevated. Policymakers said the impact of the energy shock linked to the Middle East conflict would persist for some time and that the outlook for medium-term inflation "remains uncertain."
"With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target mid-point,” the RBNZ said in its accompanying Monetary Policy Review statement.
The decision to hike was in line with 22 of 28 economists polled by Reuters..
The central bank, which last tightened policy in April 2023, has slashed rates by 325 basis points since August 2024 to support an economy struggling to gain traction as inflation receded. However, the oil shock stemming from the Iran war is expected to have pushed inflation significantly beyond the central bank's target range of 1% to 3%, forcing policymakers to bring forward rate hikes despite an unsteady recovery.
The kiwi dollar firmed 0.3% to $0.5692, having slipped 0.3% overnight when fresh hostilities between the United States and Iran lifted oil prices and hit risk appetite.
Two-year swap rates were up 6 basis points at 3.3841%, while 10-year bond yields added 9 basis points to 4.543%. Yields had climbed overnight in line with a spike in the U.S. bond market, yet they were still 1 basis point under Treasuries having outperformed for most of the past three months.
The central bank said future decisions will depend on how incoming data, price-setting behaviour, and the strength of economic activity affect medium-term inflation pressures.
Capital Economics senior Asia economist Abhijit Surya said the RBNZ's message broadly comports with the view that rates will rise gradually to a peak of 3.25% next year.
"Overall, the MPC’s cautious approach sits well with our view that the bank will raise rates at roughly every other meeting going forward," he said.
TIGHTER POLICY MIRRORS GLOBAL TREND
The statement said annual inflation is expected to have peaked at 3.9% in the June 2026 quarter before declining to 3.3% in the September quarter. It expects it to ease to close to 2% in 2027.
In May, the RBNZ forecast that annual inflation was expected to peak at 4.3% in the September quarter before returning to the 2% target midpoint in mid-2027.
The lower forecast "largely reflects smaller direct price effects due to lower oil prices, as well as reduced pass-through to other consumer prices," the statement said.
The minutes of the meeting noted that the committee agreed that while further OCR increases appear likely at upcoming meetings, their timing was highly uncertain.
The South Pacific nation's economy returned to growth in the second half of 2025, but momentum appears to have been blunted by war in the Middle East and the resulting energy shock. With oil prices now easing, policymakers expect some relief for households and businesses, supporting growth while helping to ease inflation.
New Zealand's shift towards tighter policy mirrors a broader global trend, with major central banks including the European Central Bank and the Reserve Bank of Australia raising rates, while the Federal Reserve has adopted a more hawkish tone as policymakers move to contain inflation.
"Markets expect global policy rates to increase above pre-conflict levels, as central banks may need to respond to persistent energy-driven inflation pressures," the central bank said. - Reuters
