RBNZ Hikes Rates Amid Growing Price Pressures

© Reuters.

By Oliver Gray

Investing.com - New Zealand’s Reserve Bank Monetary Policy Committee lifted the official cash rate by 25 basis points to 0.75% Wednesday, in line with market expectations as policymakers signaled that they will need to tighten monetary settings more quickly than previously expected to contain inflation.

Fresh forecasts published by the RBNZ show the cash rate rising to 2% by the end of 2022, a year sooner than projected 3 months ago.“Capacity pressures have continued to tighten” and “employment is now above its maximum sustainable level,” the RBNZ said. “A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.”

Meantime, price pressures are becoming more broad-based and persistent as a labor shortage begins to drive up wages. “The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls,” the RBNZ said. “These immediate relative price shocks risk generating more generalized price rises given the current domestic capacity constraints.”  Policymakers are now expecting CPI inflation to hit 5.7% in the near term before returning  to 2% over the next two years.

The RBNZ is at the forefront of global stimulus withdrawal as central banks across the globe begin to tighten monetary settings as economies reopen. However, there remains significant uncertainty around the economic outlook as Kiwis brace for further spead of Covid-19 across the country ahead of Auckland's border reopening.

The Kiwi slipped 0.42% to a fresh 6-week low, disappointing traders betting on a more aggressive hike to 1%. New Zealand 2-Year yield slumped 14 basis points to 1.96% while New Zealand 10-Year yields retreated to 2.528%.