New Zealand’s central bank hiked its benchmark rate by a record 75 basis points and signaled more tightening despite looming recession.
The Monetary Policy Committee of the Reserve Bank of New Zealand decided to raise the Official Cash Rate to 4.25 percent from 3.50 percent.
The bank has tightened its monetary policy by 400 basis points over the last nine consecutive meetings. The current OCR level is the highest since January 2009.
“The Committee remains resolute in achieving the Monetary Policy Remit,” Governor Adrian Orr said.
In order to bring inflation back to the target, the committee said the interest rate needs to reach a higher level, and sooner than previously suggested.
At the meeting, members discussed an even bigger reduction of 100 basis points. The bank now expects the official interest rate to peak at 5.5 percent in 2023 compared to the previous outlook of 4.1 percent.
“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen,” the bank said.
The central bank expects inflation to return to within the 1 to 3 percent target band in the second half of 2024, and to 2 percent by the end of the projection.
The economy is forecast to enter a recession in 2023. The peak to trough decline in the level of GDP is estimated to be about 1 percent.
Although the recession is assumed to be spread over several quarters, there is uncertainty about the timing, the bank noted.
“It now seems likely that the OCR will peak above our existing forecast of 5.0%, but we still expect inflation to moderate faster than the Bank is anticipating, opening the door to rate cuts late next year,” Capital Economics economist Marcel Thieliant said.
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