New Zealand central bank raised rates by 50 basis points as tensions of an inflation surge

April 14, 2022: -On Wednesday, the Reserve Bank of New Zealand (RBNZ) increased interest rates by 50 basis points to 1.50%, its fourth raise protecting from the rapidly growing inflation.

The central bank said that the 50-basis point move, which was its vast rate increase in over 20 years, took the cash rate to a more neutral stance and reduced inflation risks.

“A larger move also provides more policy flexibility ahead of the highly uncertain global economic environment,” the central bank said.

The RBNZ is one of the most aggressive central banks to roll back stimulus as policymakers sought to get on top of a red-hot housing market and the surging inflation. Although, the South Pacific Island nation now faces the worst of the COVID pandemic, as the Omicron cases sweep through the population between the relaxation of rules.

The central bank meeting said the board members agree that their policy “path of least regret” is to raise the OCR by more now, head off the increasing inflation expectations, and lessen any unnecessary volatility in output, interest rates, and the exchange rate in the coming time.

The members were aware that the cash rate was stimulatory at its current level.

Imre Speizer, head of NZ markets strategy at Westpac, said it was not an overly hawkish outcome given the market’s pricing.

“The key point is that they have signaled that the OCR track remains about the same. This is moderately hawkish; the currency can go up a little bit,” he said.

After the RBNZ decision, the kiwi dollar increased by 0.5% to $0.6885 but remained well short as it had recently revived by $0.7034 five months ago.

The central bank now faces opposing challenges. House prices are slowing down, and business and consumer confidence are also not so stable. Simultaneously, inflation is high, and the employment rate is low.

New Zealand also has other challenges as the Omicron variant of Covid-19 cases remains high. The Ukraine war has become a threat to undermine global growth while further heightening inflationary pressures.