By Ambar Warrick
Investing.com–The Reserve Bank of New Zealand raised interest rates by a record 75 basis points on Wednesday and warned of a possible near-term economic downturn as it continues to move against inflation.
The central bank increased it by 75 basis points to 4.25%, the highest level since the 2008 financial crisis. The record high increase was widely expected given that the central bank will not be able to recover for the next three months. steps due to the Christmas and summer holidays.
After the decision, the share price rose by 0.5%.
The move comes as New Zealand faces its highest inflation rate in 32 years, despite the RBNZ being one of the first major central banks to begin tightening policy after the COVID-19 pandemic. The bank has raised interest rates by a total of 400 basis points since August 2021.
The RBNZ said in a press release Wednesday that higher interest rates were needed to bring inflation within its target range over the medium term. It also said that short-term inflation expectations had risen due to stubbornly high food and fuel prices.
The bank said local demand for goods and services remained robust despite global economic headwinds and outpaced supply, fueling inflation.
The country’s annual rate was 7.2% in September, well above the RBNZ’s target range of 1% to 3%. The high numbers are likely to lead to more rate hikes by the RBNZ, potentially weighing on economic activity.
“Because the New Zealand economy is starting from a position of very high inflation and acute labor shortages, a period of economic contraction is likely as economic activity eases from elevated levels,” the RBNZ said in a statement.
“The peak-to-trough decline in gross domestic product (GDP) levels is expected to be about 1 percent.”
The bank said labor shortages supported wage growth, which also contributed to inflation. It said inflation will remain high in the near term, reaching 7.5% over the next two quarters, and that CPI inflation will only move toward the bank’s target range by 2025.
Non-tradable inflation, which is influenced by the price of locally produced goods and services and consumers in New Zealand, will also remain high for the next two quarters, according to the RBNZ.