New Zealand central bank raises cash rate, more to come

The Reserve Bank of New Zealand raised the official cash rate, the second central bank among developed nations after Norway to deliver a post-crisis interest rate increase, as the economy battles high inflation and a red-hot property market.

As widely anticipated, the central bank increased on Wednesday the interest rate by 25 basis points to 0.5 per cent, its first tightening in seven years.

The central bank was ready to act in August, but an outbreak of the delta COVID-19 strain derailed the move. This time, the central bank was ready to pull the trigger as inflation remains well above target, employment is at or above maximum sustainable levels, and property prices have surged. On top of that comes faster than expected economic growth, up 2.8 percent in the June quarter.

“It is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment,” said Adrian Orr, governor of the RBNZ, following the decision.

The central bank noted current COVID-19-related restrictions have not materially changed its outlook for inflation and employment and highlighted capacity pressures remaining evident in the economy, particularly in the labour market.

Looking at the future, the central bank is likely to tighten further.

“The committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment.”

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