In an attempt to cool a heated property market and rising inflation, New Zealand’s central bank has announced a hike in its cash rate by 25 basis points on Wednesday. Economists had expected a hike over a month ago, but the response was shelved following the most recent Covid-19 outbreak in the country and the subsequent lockdown.
The Reserve Bank of New Zealand (RBNZ) has increased the cash rate to 0.50% following 18 months of retaining it at 0.25%. The New Zealand dollar rose marginally on this announcement but has since fallen back to $0.6930. The share market also fell, with the S&P/NZX 50 Index dropping 33.55 points to 13,166.44 on Wednesday.
This is the first rate hike announcement by the RBNZ in 7 years since July 2014. This move also makes New Zealand one of the first developed nations to reverse rate cuts since the pandemic started. The trend began in August this year when South Korea increased its base rate by 0.25%. The RBNZ also said that more stimulus measures were likely to be removed as the economy continues to recover. This will be pegged on the medium-term outlook for inflation and employment.
Like many other countries, New Zealand lowered interest rates and boosted funding into the local economy as a means of cushioning the effects of lockdowns and border closures. The reversal is now expected to help lower household debt and housing prices that have been spiking in recent months.
The strong economic recovery seen since the pandemic recession last year has been attributed to the country’s success in quelling outbreaks and spreads of the Covid-19 virus. This saw the country reopen its economy ahead of other developed nations. The most recent outbreak however created a shortage of labour and goods that stimulated inflation. Housing market prices have also been soaring in recent months, driven by record-low interest rates.
The RBNZ does not expect the economic outlook to change much even with the most recent lockdowns. Rather it expects activity to quickly resume once measures are eased. Financial experts predict that the tightening cycle will remain at 25 basis point increments rather than the 50 basis point hikes that the government had considered before the most recent lockdown. The government has indicated that there may be a need to find ways to live with the virus as it ends its zero Covid policy. It is instead looking to increasing vaccination numbers as a way to controlling the pandemic.
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