New Zealand’s central bank stepped up its fight against soaring prices, raising its key rate to its highest level in more than 13 years.
The Reserve Bank of New Zealand (RBNZ) raised its key rate by 0.75 percentage points to 4.25%.
This is the biggest increase since the rate, known as the official exchange rate, was introduced in 1999.
This comes after the country’s annual inflation rate stood at 7.2% in the three months to the end of September.
Like much of the rest of the world, New Zealand has seen the cost of living rise sharply as the global economy emerges from the pandemic and the war in Ukraine has driven up the cost of fuel and food.
The RBNZ’s updated forecast also indicated that the country’s economy would fall into recession in September next year. A recession is generally defined as when an economy contract for two three-month periods – or quarters – in a row.
“Because the New Zealand economy is starting from a very high inflation and acute labour shortages, an economic contraction is likely,” the RBNZ said in a statement.
“Trying to avoid an economic contraction by limiting any increase in short-term interest rates would likely lead to a longer period of high inflation. This, in turn, would likely lead to higher interest rates and a longer contraction. potentially needed to put inflation and employment back on a more sustainable path,” he added.
Economists at the bank ANZ welcomed the move.
“Hope is not a strategy. The RBNZ Monetary Policy Committee gets that and deserves a pat for facing the challenges head-on. If the facts change, they’ll change their minds. But right now, the fact is that high inflation is looking increasingly entrenched, and dithering would only worsen the problem,” ANZ Research said in a note to investors.
During a parliamentary hearing on Wednesday, New Zealand’s Finance Minister Grant Robertson said the world economy faced a “year of reckoning” in 2023.
“Countries will either be in recession or feel like they are,” Mr Robertson added.
After the RBNZ interest rate announcement, the New Zealand dollar hit a three-month high against the US dollar before easing a little.