Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

New Zealand delivers record rate hike, flags 2023 recession

Published 11/22/2022, 04:04 PM
Updated 11/23/2022, 12:15 AM
© Reuters. FILE PHOTO: Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard/File Photo

© Reuters. FILE PHOTO: Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard/File Photo

By Lucy Craymer

WELLINGTON (Reuters) - New Zealand's central bank on Wednesday hiked interest rates by a record amount and warned the economy might have to spend an entire year in recession to bring sky-high inflation under control.

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 75 basis points to 4.25% and crucially now sees rates peaking at 5.5%, compared with a previous forecast of 4.1%.

Graphic: New Zealand's record rate hike - https://graphics.reuters.com/NEWZEALAND-ECONOMY/RATES/zdvxdoqmjvx/chart.png

The central bank's overtly hawkish tone caught some traders off-guard, lifting the local dollar and sending swap rates higher, while its predictions of a recession also surprised.

The RBNZ projects the economy will start contracting in the second quarter of 2023 and continue declining until the first-quarter of 2024.

"Inflation is no one's friend and in order to rid the country of inflation we need to reduce spending levels," RBNZ Governor Adrian Orr told a press conference. "That means that we will have a period of negative GDP growth."

Minutes from the meeting showed the RBNZ had even considered a full percentage point hike.

Markets were quick to price in a change in rate expectations.

Key two-year swap rates surge 27 basis points at 5.26%. The market is now pricing in a cash rate peak of 5.54%.

The kiwi dollar climbed 0.4% to trade at $0.6164.

'CLEAR URGENCY'

The RBNZ's ninth straight hike means the cash rate has now risen 400 basis points since October 2021 and is the most aggressive policy tightening since 1999 when the cash rate was introduced. It is now at a level not seen since January 2009.

Graphic: The race to raise rates - https://graphics.reuters.com/NEWZEALAND-ECONOMY/RATES/dwvkdrkoapm/chart.png

"The RBNZ's stance was very hawkish, including discussing the potential for a 100bp hike," said ASB Bank in a note.

Graphic: Central banks ramp up fight against inflation - https://graphics.reuters.com/NEWZEALAND-ECONOMY/RATES/gkplwgbrjvb/chart.png

While 15 of 23 economists polled by Reuters had expected the central bank's policy committee to lift the cash rate by 75 basis points, the hawkishness of the bank's projections and language surprised.

ASB Bank added that the statement demonstrated a "clear urgency" but with three months until the next decision, the RBNZ would now watch the data flow to see if its level of hawkishness remained appropriate.

Inflation is currently at just below three-decade highs and non-tradeable inflation--or prices for goods that are not exposed to global markets--is running at a record. There are also signs wage pressures are heating up while inflation expectations have shown no signs of slowing.

ANZ noted the RBNZ was conducting monetary policy in a haze of uncertainty and continued to be open about that fact.

"In such an environment, it makes sense to look at the costs of being wrong in either direction and these simply aren't comparable," ANZ said.

© Reuters. FILE PHOTO: Two people walk towards the entrance of the Reserve Bank of New Zealand located in the New Zealand capital city of Wellington, March 22, 2016. REUTERS/Rebecca Howard/File Photo

If data does worsen significantly before the next meeting, it can adjust with little harm but if the opposite were to happen the RBNZ would have regretted not going harder, ANZ said.

House prices, which had been a significant inflationary factor in the tightening cycle are now down around 11%, according to the central bank. The RBNZ expects prices will fall a total of 20% from the November 2021 peak.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.