WELLINGTON, New Zealand (AP) – New Zealand’s central bank surprised economists Wednesday by implementing an aggressive half-point rate hike to bring its benchmark interest rate down to 5.25%.
It was the Reserve Bank of New Zealand’s 11th straight rate hike as it tries to tame inflation, which is running at 7.2%, about 2% above the bank’s target level.
This brings the key rate to its highest level since the global financial crisis in 2008.
New Zealand’s benchmark rate is now the highest in the developed world, and the bank’s aggressive action was in stark contrast to Australia’s central bank, which on Tuesday decided to halt its round of rate hikes and leave its benchmark rate at 3.6%.
Most economists had expected the Reserve Bank of New Zealand to implement a more modest quarter-point hike after the country’s economy contracted in the December quarter and a devastating cyclone in February killed 11 people and damaged homes and infrastructure. The infrastructure suffered billions of dollars in damage. ,
The currency rose on the announcement with trading at around 0.64 to the US dollar per 1 New Zealand dollar.
The increase could raise the cost for consumers to borrow on everything from credit cards to mortgages.
The Reserve Bank’s Monetary Policy Committee said in a statement that inflation remained high and persistent, while employment was well beyond its maximum sustainable level, with the unemployment rate at a low of 3.4%.
The committee acknowledged that economic activity in the December quarter was lower than expected.
However, demand continues to outstrip the supply capacity of the economy, exerting downward pressure on annual inflation.
The Committee noted that recent inclement weather has pushed prices of some goods and services higher, adding to the risk that inflation expectations will remain too high.
It said that in the medium term, it expects economic activity to be boosted by the reconstruction from Cyclone Gabriel.
“New Zealand’s economic growth is expected to slow through 2023, given the ongoing effects of a slowing global economy, a decrease in residential building activity and a tightening of monetary policy,” the committee said. “This deceleration in growth is necessary to bring inflation back to the target over the medium term.”
The rate hike sparked concern among lawmakers across the political spectrum.
“Mortgage is just one aspect of the economic pain to come,” said David Seymour, leader of the libertarian ACT party.
Nick Perry, The Associated Press
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