"Inflation is still too high and persistent, and employment is beyond its maximum sustainable levels," it said. It also noted upside risks to inflation from the severe weather earlier this year and government spending, and raised concerns about a possible fall in lending rates.
UNEXPECTED The decision surprised markets with no economists in a Reuters poll predicting a 50 basis point hike.
The RBNZ, among the first global central banks to withdraw pandemic-era stimulus, has pursued one of the most aggressive tightening cycles around the globe. Wednesday's decision comes in sharp contrast with the Reserve Bank of Australia's decision to hold the cash rate steady. The New Zealand dollar bounced 1% to touch a two-month high of $0.6383 before standing 0.73% firmer at $0.6351. Two-year swaps jumped 15 bps to 5.11%, still well below the March peak of 5.53%, while the 90-day bank bill rate implied the official cash rate would peak at 5.5%. "The RBNZ is determined to lower inflation, whatever the cost. And today's supersized hike reflected the RBNZ's resolve, Kiwibank economists said in a note. Kiwibank along with ANZ, Bank of New Zealand, ASB Bank and Capital Economics now expect the cash rate to peak at 5.5%.
DARK CLOUDS LOOM New Zealand's economy contacted 0.6% in the fourth quarter and economists see a possibility the country is already in recession given the impact of the two severe weather events in January and February. The central bank has forecast the country will move into a shallow recession, something it is hoping for as it wants to dampen inflation. The central bank noted that while the level of economic activity over the fourth quarter was lower than anticipated and there were emerging signs of capacity pressures easing, demand continues to significantly outpace supply capacity.
Capital Economics said the RBNZ's tightening bias all but
firms up their forecast that New Zealand will enter a protracted
recession this year.
"With the downturn likely to generate rapid disinflation, we
still think rate cuts will be on the table before the year is
out," it said.
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(Reporting by Lucy Craymer; Editing by Jacqueline Wong)