Sunday, November 28

Interest rate hike in New Zealand increases inflationary pressures on central banks | New Zealand – by the world

New Zealand’s central bank has hiked rates to 0.75% for the second time in as many months, with many forecasters expecting borrowing costs to climb to at least 2% and possibly higher by next year.

As a warning sign to central banks around the world struggling to contain inflationary pressures, the Reserve Bank of New Zealand (RBNZ) raised the official cash rate by 25 basis points to 0.75% Wednesday, as expected in its final monetary policy meeting of the year.

The RBNZ said further stimulus easing may be needed. “The committee expected that the interest rate would have to be increased gradually and, on condition that the economy develops as expected, the interest rate will likely have to be increased above its neutral rate,” said minutes of the meeting.

Its projections signaled a more aggressive tightening cycle, reaching 2.5% by 2023 and growing higher by December 2024, and many independent economists agreed.

“Given the heat in the economy, we think the RBNZ is far from over,” said Ben Udy, an economist at Capital business. “We assume that the bank will raise interest rates to around 2.0% next year by the middle of next year.”

Michael Gordon, acting chief economist at Westpac Bank in Australia, said he believed the RBNZ could hike rates by 0.5% at its February meeting.

“We continue to anticipate a number of hikes in upcoming policy meetings and forecast that OCR will peak at 3% in the third quarter of 2023.”

The RBNZ’s decision to begin its so-called rate hike cycle with a 0.25% rate hike in October came hours after former Bank of England Governor Mervyn King said central bankers had surprised by rising prices who exposed their “King Canute” inflation theory.

Lord King used a speech in London to accuse banks around the world of relying too heavily on models that showed inflation returned to low levels without a rate hike. Inflation theories had to explain the changes in the financial system through the banks’ money printing systems, which King said had become “unsustainable”.

Pressure on the US Federal Reserve to hike rates increased earlier this month as the October inflation figure reached a 30-year high of 6.2%, driven by rising energy costs and congestion across the economy as supply chains shift after the pandemic.

Although the Fed believes inflation is “temporary” and has steered markets not to expect rate hikes until the end of next year, there is growing expectation that it could acknowledge investor concerns by using massive monetary stimulus after the Pandemic withdraws faster than planned when it closes on May 14-15 December meets.

Inflation is a global problem and the UK is not far behind the US with inflation 4.2% in October. The Bank of England was on the verge of hike rates in early November. That near miss left most forecasters are certain that the Monetary Policy Committee will act when it meets on December 16th. The European Central Bank’s Policy Setting Committee meets on the same day.

Like the larger economies, New Zealand has deployed tremendous fiscal and monetary stimulus to ease the pandemic pain and help the economy recover strongly. This, in turn, has pushed inflation to its highest and the unemployment rate to its lowest in over a decade. Annual inflation reached 4.9% in the third quarter, the fastest increase in more than a decade, while the unemployment rate fell to 3.4%, its lowest level since December 2007.

Meanwhile, property prices have doubled over the past seven years and are the least affordable among OECD countries.

This pressure caused the RBNZ to hike rates in October and signal a further tightening. The country will end the lockdowns and from the 3rd

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