New Zealand raises rates by most in 22 years on surging inflation

New Zealand’s central bank raised interest rates by half a percentage point on Wednesday, its biggest increase in 22 years, following worries about surging inflation exacerbated by Russia’s invasion of Ukraine.

The Reserve Bank of New Zealand lifted its official interest rate by 50 basis points to 1.5 per cent, bringing forward an increase that it had flagged would be made this year.

The decision was announced a day after the US reported that inflation hit 8.5 per cent in March, growing at its fastest pace in 40 years, as supply chains struggled to keep up with a post-pandemic surge in demand and the war in Ukraine boosted commodity prices.

The RBNZ monetary policy committee met on February 23, the day before Russia invaded Ukraine, and lifted rates by 25 basis points. It also forecast further tightening in 2022.

But the committee said it had brought forward its decision in response to “rising inflation expectations”. The most recent inflation figure, from December 2021, was 5.9 per cent, up from 1.4 per cent a year earlier. The committee expects inflation to peak at 7 per cent in the first half of 2022.

“The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing supply disruptions in large part driven by Covid-19,” the monetary policy committee said.

“The Russian invasion of Ukraine has significantly added to these supply disruptions, causing prices to spike in internationally traded commodities and energy.”

New Zealand began increasing rates by increments of 25 basis points last October, after holding the official cash rate at 0.25 per cent for 18 months.

Wednesday’s rate rise coincided with New Zealand opening its borders to Australian tourists for the first time since a brief “travel bubble” operated between the countries in 2021 before new coronavirus outbreaks prompted Wellington to shut its borders again.

Saul Eslake, an Australian economist, said New Zealand’s rise “underscores the seriousness with which they view the near-term inflation outlook and their determination to reign it” and expected another 50 basis points rise next month.

Along with global inflationary pressures, Eslake said the RBNZ was responding to a tight employment market, a low target inflation rate and a mandate to consider house prices in monetary policy decisions.

Richard Yetsenga, chief economist at ANZ, said the RBNZ was “playing catch-up” with unexpectedly rapid inflation and also predicted the bank would raise rates by the same amount next month.

“New Zealand is showing a pattern of tending to get more aggressive as the cycle goes on,” he said.

“One of the elements [of today’s announcement] seems to be a signal that by lifting 50 basis points now, hopefully that reduces the amount they need to hike over the cycle.”

Australia, New Zealand’s second-biggest trading partner, has kept interest rates on hold at a record low of 0.1 per cent, but has signalled that it would raise rates within the next few months even though inflation is low by global standards, at 3.5 per cent.

Eslake said he expected the Reserve Bank of Australia to raise rates in June, adding that the country had been partly insulated from price rises by weak wage growth and an economy that relies on domestic coal rather than imported gas and therefore was not subject to the energy price jumps observed in Europe.