N Zealand central bank signals rate hike in 22

27 May, 2021 12:00 AM printer

WELLINGTON: New Zealand’s central bank left its benchmark interest rate at an all-time low in a widely expected decision on Wednesday, but projected a rate hike by September next year, sending the local currency to a three-month high.

The Reserve Bank of New Zealand (RBNZ) sees at least one 25 basis point rate hike to 0.5 per cent by September 2022 and projected the official cash rate (OCR) would reach 1.5 per cent by the end of 2023, underscoring expectations that a string of recent positive data will lead policymakers to tighten rates sooner rather than later, report agencies.

In response, the New Zealand dollar jumped 1 per cent to as high as US$0.7308, a level not seen since Feb 26.

The central bank retained its large scale asset purchase programme at NZ$100 billion (S$96.76 billion) while leaving the Funding for Lending Programme unchanged.

New Zealand’s success in curbing the coronavirus pandemic allowed it to reopen its domestic economy and establish a safe “travel bubble” with neighbouring Australia, boosting employment and consumer spending. New Zealand’s economic growth has also been helped by a jump in the prices of key commodities, particularly dairy.

The RBNZ, however, was in no hurry to raise rates until its inflation and employment targets are met, pointing out that domestic economic recovery was still uneven.

“The committee noted that on current projections the OCR eventually increases over the medium term, but agreed that this is conditional on the economic outlook evolving broadly as anticipated,” minutes of the Wednesday meeting showed.

Members reinforced their preference to maintain current policy settings until they were confident that inflation and employment objectives would be met, the minutes showed.

“They agreed this would require considerable time and patience.”

Financial markets are pricing in the first rate move as early as August 2022, though much depends on what other central banks do as the RBNZ could be reluctant to tighten alone and risk sending its dollar sharply higher.