New Zealand on Wednesday became one of the first developed economies to hike interest rates since the onset of the coronavirus pandemic, as the central bank bids to rein in rising inflation.
In a widely tipped move, the Reserve Bank of New Zealand lifted its base interest rate 0.25 points to 0.5 percent Wednesday, ending an 18-month freeze aimed at keeping the economy ticking over during the Covid-19 crisis.
It signalled further increases were likely, with analysts predicting the cost of borrowing could reach 1.5 percent by mid-2022.
“It is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment,” the central bank said in a statement.
Emerging economies like Brazil, Russia and Mexico have lifted rates in recent months, along with a small number of developed economies including South Korea.
Stock markets have sold off in recent weeks on concerns that extended central bank and government stimulus and rising commodity prices will spark inflation.
The US Federal Reserve has so far maintained its monetary policy stimulus, though markets expect a change before the end of the year.
New Zealand’s central bank cited a recovering global economy and increased international mobility caused by rising vaccination rates in making its decision.
It said inflation was set to rise because of higher oil prices, increasing transport costs and the impact of supply shortfalls, noting a global move towards tighter monetary policy was already underway.
“While economic uncertainty remains elevated due to the prevalent impact of Covid-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus,” it said.
The bank said New Zealand’s inflation rate was set to rise above 4.0 percent in the medium term, exceeding its 1.0-3.0 percent target range.
The base rate had been at a record low of 0.25 percent since March 2020.
The rise had been widely flagged by the bank but was delayed in August when the country was plunged into a national lockdown by a Covid-19 outbreak.
The virus has since been contained to Auckland and the bank signalled “further removal of monetary policy stimulus is expected over time”.
Kiwibank chief economist Jarrod Kerr said New Zealand monetary policy had entered its first tightening cycle in seven years.
“The Kiwi economy has solid momentum and the RBNZ has good reason to withdraw stimulus… we expect today’s rate hike will be the first in a series of hikes towards 1.5 percent and possibly higher,” he said.
