Lucy Craymer

WELLINGTON (Reuters – New Zealand’s central banks raised its interest rates 50 basis points to 2.0% on Wednesday. The move was part of its efforts to control inflation. They also signaled that the cash rate would reach a higher point than expected.

Only one of 21 economists polled by Reuters predicted that the Reserve Bank of New Zealand, (RBNZ), would increase the official cash rate (OCR), 50 basis points to 2.0%. One economist forecast a 25 basis-point increase.

In a statement, the RBNZ explained that an earlier and larger OCR increase reduces the likelihood of inflation becoming persistent. It also gives more policy flexibility in light the extremely uncertain global economic environment.

The New Zealand dollar reached a record high of $0.65 three weeks after the statement was released.

The OCR saw a second 50-basis point rise on Wednesday. Since October’s tightening cycle began, the rate has risen 1.75 percentage points. According to the projections, the cash rate will rise to close 4.0% during the second half next year and remain at that level through 2024.

This increase brought the cash rate up to its highest level since November 2016. As authorities attempt to control inflation, the RBNZ is a leader in global efforts to remove extraordinary stimuli that were put in place in response to the pandemic.

Inflation is expected to reach 7.0% by the end of the June quarter 2022 according to the central bank, which is well over its target of 1-3%. This highlights the need for price control.

The central bank stated that “a broad array of indicators highlights that production capacity constraints remain persistent” and continued inflation pressures are still prevalent. In addition, the central bank said that global and domestic headwinds were strong due to increased global economic uncertainty as well as higher inflation.

RBNZ is trying to deal with competing economic problems, like a tight labour market or inflation that has reached three decades highs.

However, house prices have fallen since the pandemic. Consumer confidence is also down as the Ukraine conflict poses dangers to global growth.