RBNZ delivers biggest ever rate hike in another hawkish decision

New Zealand’s benchmark stock index was in the red on Wednesday, after the country’s central bank delivered its biggest-ever rise in interest rates as it tightened policy for the eighth consecutive time.

The S&P/NZX 50 lost 0.85% by the close in Wellington, to 11,323.80, after the Reserve Bank of New Zealand tacked 75 basis points onto the official cash rate, taking it to 4.25%.

It had slashed the rate to a record low of 0.25%, at the beginning of the Covid-19 pandemic in March 2020, from 1%, and then progressively raised it in each of its last eight scheduled policy decisions since October 2021.

The rate was now at its highest level since January 2009, when the RBNZ cut the official cash rate to 3.5% from 5%, in the wake of the 2008 global financial crisis.

In his post-decision press conference, the central bank’s governor Adrian Orr said its only target was to move the official cash rate to a level that would see inflation come down.

“Our core inflation rate is too high,” Orr told the media, adding that the RBNZ was “well down the path of the tightening cycle”.

In a separate press release, the RBNZ said members of its policy committee agreed that further tightening was still needed.

Alex Loo, macro strategist at TD Securities, added that the central bank managed to surpass hawkish expectations through its forecast of a rate peak of 5.5% in the second quarter of 2023 - a “whopping” 140 basis points higher than its previous 4.1%.

Loo added that despite the forecast for the rate to remain at 5.5% through 2023 and well into mid-2024, it only expected a "shallow recession".

“The Bank may be underestimating the possibility of a more severe contraction in economic activity,” he noted.

“Nevertheless, the Bank is not backing down, signalling that higher interest rates are necessary and an eagerness to quickly reach the OCR peak.”

Thus, Loo said the RBNZ was likely leaning towards a 75-basis point hike at its February meeting, contrary to TD’s call for a 50-basis point hike.

“However, we get two key data prints before the February meeting - the fourth quarter inflation and labour reports.

“Given that the Bank appears to be reactive to data related to its remit - labour and inflation - a downside miss may nudge the committee to opt for a 50-basis point hike instead.”

The Kiwi dollar strengthened in the wake of the RBNZ’s rate decision to last advance 0.18% on the greenback to NZD 1.6222.

Reporting by Josh White for Sharecast.com.