New Zealand Reserve Bank surprises with 50 basis point interest rate hike


The Reserve Bank of New Zealand Wednesday raised a key interest rate by a surprising 50 basis points in a continuing effort to fight inflation. The rate went from 4.75 percent to 5.25 percent. Pictured is the Reserve Bank of New Zealand in Wellington. Photo by Clilly4/Wikimedia Commons

April 5 (UPI) -- The Reserve Bank of New Zealand Wednesday raised a key interest rate known as the Official Cash Rate by 50 basis points, surprising analysts who were expecting a smaller rate increase.

The bank's Monetary Policy Committee raised the interest rate from 4.75% to 5.25%, saying the interest rate must increase to return inflation to its desired range of 1-3%.

"Inflation is still too high and persistent, and employment is beyond its maximum sustainable level," it said.

As the bank announced the interest rate hike, it said New Zealand's economic growth is expected to slow through 2023 due to a combination of factors including "the slowing global economy, reduced residential building activity, and the ongoing effects of the monetary policy tightening to date."

New Zealand's interest rate hike comes as Australia's Reserve Bank decided to keep its cash rate at 3.6% after ten straight interest rate increases.

The Australian bank said inflation there has peaked and the bank decided to hold interest rates steady "to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook."

The size of New Zealand's rate hike surprised some analysts who had been expecting a rate hike of 25 basis points.

Abhijit Surya, Australia and New Zealand economist at Capital Economics, said New Zealand is likely headed for a recession.

"With the downturn likely to generate rapid disinflation, we still think rate cuts will be on the table before the year is out," Surya said.

New Zealand's Reserve Bank said the committee considered a 25 basis point increase but settled on the 50-point hike.

"The Committee agreed that a further increase in the OCR is needed at this meeting to ensure core inflation and inflation expectations begin to fall," it said.

Looking ahead, the bank said it expects to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations in New Zealand.

"The extent of this moderation will determine the direction of future monetary policy," the bank statement said.