New Zealand's central bank hikes key interest rate to 5.25%

By AP News

New Zealand’s central bank surprised economists on Wednesday by imposing an aggressive half-point rate rise to bring its benchmark interest rate to 5.25%

New Zealand Economy

WELLINGTON, New Zealand (AP) — New Zealand's central bank surprised economists on Wednesday by imposing an aggressive half-point rate rise to bring its benchmark interest rate to 5.25%.

It was the Reserve Bank of New Zealand's 11th straight rate hike as it tries to cool inflation, which is running at 7.2%, far above the bank's target level of around 2%.

It brings the key rate to its highest level since the Global Financial Crisis in 2008.

New Zealand's benchmark rate is now among the highest in the developed world, and the bank's aggressive action stood in contrast to Australia's central bank, which on Tuesday decided to pause its round of rate hikes and leave its benchmark rate at 3.6%.

Most economists had expected the Reserve Bank of New Zealand to impose a more modest quarter-point rise after the nation's economy contracted in the December quarter and a destructive cyclone hit in February, killing 11 people and causing billions of dollars in damage to homes and infrastructure.

The currency rose on the announcement, with 1 New Zealand dollar trading at about U.S.$0.64.

The increase can raise the borrowing costs for consumers on everything from credit cards to mortgages.

The Reserve Bank's Monetary Policy Committee said in a statement that inflation remained too high and too persistent while employment was beyond its maximum sustainable level, with the unemployment rate at a low 3.4%.

The committee acknowledged that economic activity in the December quarter was lower than it anticipated.

“However, demand continues to significantly outpace the economy’s supply capacity, thereby maintaining pressure on annual inflation," it said.

The committee said the recent severe weather had led to higher prices for some goods and services, increasing the risk that inflation expectations would remain too high.

It said that over the medium term, it expects economic activity to get a boost from the Cyclone Gabrielle rebuild.

“New Zealand’s economic growth is expected to slow through 2023, given the slowing global economy, reduced residential building activity, and the ongoing effects of the monetary policy tightening to date,” the committee said. “This slowdown in spending growth is necessary to return inflation to target over the medium-term.”

The rate rise caused concern among lawmakers across the political spectrum.

“Mortgages are just one aspect of the economic pain that is coming," said David Seymour, leader of the libertarian ACT Party. “Something has to break if the Reserve Bank continues with these hikes and the next thing will be job losses.”


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