WELLINGTON: New Zealand’s central bank is raising its key interest rate for a second straight meeting, aiming to shift to less stimulatory settings in an effort to head off inflationary pressures.
The Reserve Bank’s Monetary Policy Committee increased the official cash rate (OCR) by a quarter percentage point to 2.75% yesterday in Wellington, as was widely expected. The RBNZ’s new forecasts indicate the chance of one further quarter-point hike before the end of this year.
“The Committee judges that gradually removing monetary stimulus is appropriate to return inflation to the 2% target mid-point while supporting growth and employment,” the RBNZ said in its post-meeting statement.
“Future policy decisions will depend on the Committee’s judgment of the balance of risks to medium-term inflation.”
The New Zealand dollar fell almost half a US cent after the announcement as the RBNZ hinted at a more cautious near-term stance, buying 58.50 US cents in Wellington. The yield on policy sensitive two-year government notes fell six basis points to 3.59%.
The six-person committee reached its decision by consensus, it said in its Record of Meeting.
The RBNZ initiated a policy tightening campaign in July, signalling it wanted to wind back stimulus after headline inflation climbed above its 1% to 3% target range.
The prospect of a second half economic recovery is likely to further fuel price pressures and prompted investors and most economists to predict the central bank will keep hiking toward a neutral cash rate of 3% or more.
The RBNZ’s forward guidance showed the average OCR rising to 2.81% in the fourth quarter. That’s less than the 2.84% in May’s statement. It forecasts the average OCR will be 3.07% by mid-2027.
“Conditional on the central economic outlook, members judged that the OCR may need to increase further,” the committee said. “However, the future OCR path is not pre-determined.”
Ahead of the release, investors were wagering about a 65% chance of a quarter-point hike at the next meeting in October, while a rate rise by December was fully priced.
Rising borrowing costs will be deeply unwelcome for the center-right government as it prepares to campaign for November’s election on a platform of superior economic management. — Bloomberg
