New Zealand has raised interest rates for the first time in seven years as it attempts to rein in inflation rates and a surging property market. The Reserve Bank of New Zealand increased interest rates by 25 basis points on Wednesday.
The interest rate hike has been seen as the start of a tightening cycle that has been long overdue. Most analysts had forecasted the move since August. However, the action was delayed due to a recent outbreak of COVID-19 and the ensuing lockdown in major cities such as Auckland.
The increase translates to about 0.50%, which is in line with forecasts made by economists. Following the announcement, the New Zealand dollar quickly spiked but then fell back to about $0.6930 within the range of the broader market movement. Analysts expect the benchmark rate to reach 1.50% by the end of next year and 1.75% by 2023.
Analysts at BNZ in Wellington said the move was in line with everyone's expectations and it should be the start of a series of more rate hikes. Apart from the interest rate hike, the RBNZ said that it will also be gradually rolling back monetary stimulus policies in response to the movements in inflation and employment rates in the medium term.
New Zealand is currently ahead of most other developed nations in terms of winding back emergency policies that lowered borrowing costs. Its neighbor, Australia, still retained its record low-interest rates for the 11th straight month. Countries such as South Korea and Norway have already raised rates following the lifting of pandemic lockdowns.
Unlike other nations, New Zealand was quick to recover from the initial spread of the coronavirus last year. The country was able to quickly reopen its economy after it claimed to have beaten back the spread of the virus.
When it first closed off its borders, there was a temporary shortage of labor and goods, which pushed up inflation. This also contributed to a surge in the property market, which was also driven by ultra-low interest rates as part of the central bank's initial response.
Economists said the recent emergence of new COVID-19 cases in the country has not materially changed the outlook for inflation and employment in the medium term. Economic activity is still expected to recover at the same pace.
