Vivek Maishra

BENGALURU (Reuters – New Zealand’s central banks will increase its policy interest rates by half a percent to fight rising inflation. This is the largest hike in recent meetings. A Reuters poll revealed that this was the most significant change.

Last month’s 50-basis point increase was the largest in OCR since the 1980s. The Reserve Bank of New Zealand (RBNZ), however, indicated that further increases were necessary to control inflation after the quarter ended at a record three decades high.

Only one economist out of 21 polled by Reuters on May 13-19 predicted that the RBNZ would increase the OCR 50 basis points to 2.00% next Wednesday. One economist forecast a 25 basis-point increase.

RBNZ would have to raise the OCR by half the percentage rate for the second consecutive meeting, marking the beginning of the OCR’s implementation in March 1999.

Inflation and disruptions to supply chains are not likely to slow anytime soon. The RBNZ will continue to be hawkish to keep price pressures under control while trying to prevent the economy from falling into recession.

Sharon Zollner chief economist of ANZ stated, “There is little doubt that unless there’s something drastic out of the left field, it will deliver another fifty basis point increase next week.”

The path ahead is more complicated than that. As evidence shows that demand is cooling, we expect the RBNZ will continue to move at the usual 25 basis points per month pace from July.

The fifth consecutive Reuters poll saw economists predicting rate increases. 18 out of 21 respondents expect that OCR will be at 2.50% or more by the end September rather than the end year, which was the prediction in the prior survey.

According to the latest survey, the interest rate will rise to 3.00% before the year ends. This would be below the level it reached in 2014.

Jarrod Kerr from Kiwibank, chief economist, stated that “I expect the cash rate to hit 3% this year… inflation expectations running well beyond the targeted 2% are a threat the RBNZ’s credibility as inflation-fighting central banks.”

“Any higher expectations will only fuel RBNZ’s determination to tighten aggressively.”

As policymakers try to manage an overinflated housing market, and rising price pressures, New Zealand’s central banks has been quick in reducing stimulus. As mortgage rates rise, house prices are starting to fall.

However, significant falls in property values could affect household wealth. This would lead to lower consumption and ultimately slower economic growth.

With this growing concern 11 out of 18 respondents predict that the cash rate will either remain at 3.0% or fall by next year. It will likely rise to 3.25 percent or more by the end of next year, according to seven other estimates.

“The RBNZ seems to believe that its strategy is to accelerate and brake more slowly. While there are some downsides, COVID is not concerned about monetary policy.

“If there is more upside risk than inflation, a 50 basis point hike in July would be a good idea.”