Economists are now expecting the Official Cash Rate (OCR) to peak at 5.5 percent in September 2023. The recent hike is the biggest since the RBNZ introduced the OCR in 1999 and takes the benchmark to its highest level since 2008.
"The Reserve Bank of New Zealand sees inflation as deeply embedded. It now believes that a recession will be needed to bring inflation back within the one percent to three percent target range," said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corporation.
New Zealand's policy-sensitive two-year government bond yield jumped 19 bps to 4.58 percent and the 10-year advanced five bps to 4.21 percent. Swap rates also climbed sharply, while the currency pared its initial gains.
The central bank is reacting to higher-than-anticipated inflation and near-record-low unemployment, which promotes the case for it to expedite the pace of tightening after five consecutive 50-point hikes.
In contrast, both Australia and Canada have delayed their rate hikes as global recession looms. (Related: Australia's central bank may aggressively increase interest rates as inflation hits 32-year high)
"The committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium-term. Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen," the RBNZ announced in a statement.
The policy committee actually considered raising interest rates by as much as 100 bps, record of the meeting showed.
The bank predicted that the economy would contract for four consecutive quarters beginning the second quarter of next year. It forecasted annual inflation will increase to 7.5 percent in the last quarter of this year from 7.2 percent. Consumer-price gains are expected to slow to five percent by the end of 2023.
The RBNZ's updated predictions show the OCR gradually decreasing from late 2024. "The committee agreed that to achieve its remit objectives, actual and expected inflation need to decline substantially," the RBNZ said.
The RBNZ's 75 bps increase isn't exactly surprising as several analysts and traders anticipated it. Still, the huge jump goes against the recent trend of central banks pivoting to a more dovish stance. For example, the Reserve Bank of Australia only increased 25 bps in its last meeting.
Experts are also surprised that the RBNZ didn't even try to soften the effect of the 75-bps increase with some dovish remarks. Instead, the message was totally aggressive, hinting many more increases to come.
"Its projections point to a peak of 5.5 percent by the middle of next year, a massive upgrade from the 4.1 percent peak that was projected in the August Monetary Policy Statement. And moving 'at pace' remains the watchword – a literal read of the published OCR track would require another 75-basis point hike at the next review in February, and a further 50 basis points in April," Westpac noted.
The RBNZ anticipates persistently high inflation to continue and even soar to 7.5 percent over the next two quarters. These aren't the conditions supportive of a pivot and the bank are responding in the most direct way possible – by raising rates again and again.
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