The Reserve Bank of New Zealand on Wednesday raised interest rates by 25 basis points to 0.75% in a bid to take the heat out of the economy.
The central bank, announcing its second rise in two months, said interest rates would probably need to rise above their neutral level.
“The (bank’s monetary policy) committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment,” the bank said in a statement.
The RBNZ’s aggressive campaign of increases will be closely watched by central banks around the world as they consider how to react to a global rise in prices.
CPI Expected To Hit 5%
The bank expects the consumer price index to rise above 5% in the near term before returning towards the 2% midpoint of its target range by the end of 2023.
“Central banks globally face the challenge of distinguishing between transitory price increases and underlying sustained inflation pressures to assess the need for, and timing of, reductions in the level of monetary policy stimulus,” the RBNZ said.
New Zealand’s central bank is unusual among its peers in that both inflation and employment are running at or above target levels, which has put pressure on the central bank to reduce monetary stimulus.
The RBNZ judged that the near-term rise in inflation was accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls.
“There is a risk that those shocks would generate more generalised price rises given domestic capacity constraints,” it noted.
“Capacity pressures have continued to tighten,” the bank said. “A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.”
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