New Zealand raises rates to maximum in 22 years due to soaring inflation

New Zealand’s central bank on Wednesday raised interest rates by half a percentage point, the biggest increase in 22 years, following concerns about soaring inflation exacerbated by the invasion of Ukraine by Russia.

The Reserve Bank of New Zealand raised its official interest rate by 50 basis points to 1.5%, announcing a hike it said would be made this year.

The decision came a day after the United States reported inflation hit 8.5% in March, rising at its fastest pace in 40 years, as supply chains struggled to follow a post-pandemic increase in demand and that the war in Ukraine had boosted commodities. prices.

The RBNZ monetary policy committee met on Feb. 23, the day before Russia invaded Ukraine, and raised rates by 25 basis points. It also foresees a further tightening in 2022.

But the committee said it moved its decision in response to “rising inflation expectations”. The most recent inflation figure, from December 2021, was 5.9%, down from 1.4% a year earlier. The committee expects inflation to peak at 7% in the first half of 2022.

“The level of global economic activity continues to generate growing inflationary pressures, exacerbated by the continued supply disruptions largely due to Covid-19,” the monetary policy committee said.

“The Russian invasion of Ukraine has significantly aggravated these supply disruptions, causing the prices of internationally traded commodities and energy to soar.”

New Zealand began raising rates in 25 basis point increments last October, after holding the official exchange rate at 0.25% for 18 months.

Wednesday’s rate hike coincided with New Zealand opening its borders to Australian tourists for the first time since a brief ‘travel bubble’ operated between the countries in 2021 before new outbreaks of coronavirus prompt Auckland to close its borders again.

Saul Eslake, an Australian economist, said New Zealand’s rise “underscores the seriousness with which it views the near-term inflation outlook and its determination to bring it under control”.

Along with global inflationary pressures, Eslake said the RBNZ was reacting to a tight labor market, a low target inflation rate and a mandate to factor house prices into monetary policy decisions. .

Australia, New Zealand’s second largest trading partner, kept interest rates at a record low 0.1% but signaled it would raise rates in coming months even if inflation is low by world standards, at 3.5 percent.

Eslake said he expected the Reserve Bank of Australia to raise rates in June, adding that the country had been partly insulated from price increases by weak wage growth and an economy that relied on coal. national rather than on imported gas and was therefore not subject to the energy price jumps seen in Europe.

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