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New Zealand’s central bank lifts rates to 2%, the highest level since 2016

<span>Photograph: Dennis Owen/Reuters</span>
Photograph: Dennis Owen/Reuters

New Zealanders could feel rising living costs bite down harder in the next few months, as the central bank lifts interest rates by half a percentage point to 2% – its highest level since 2016.

The increase matches expectations and is the second rate hike in two months as the Reserve Bank (RBNZ) attempts to rein in inflation, now at a 30-year high.

“It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,” RBNZ said on Wednesday.

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In common with larger economies, New Zealand has used huge amounts of fiscal and monetary stimulus to alleviate pandemic pain and help the economy recover strongly. This, alongside global crises such as the war in Ukraine and supply chain disruptions, has pushed inflation to 6.9% while the country’s jobless rate fell to 3.2% – the lowest since records began.

RBNZ said it “was resolute in its commitment” to keep inflation between its 1-3% target range, signalling that further rate rises could be needed – to about 3.4% by the end of the year and peaking at 3.9% from June next year.

A large and early increase in the official cash rate reduces the risk of inflation becoming persistent, the bank said. Its governor, Adrian Orr, warned that while New Zealand’s economy was strong – buoyed up by a strong labour market and sound household balance sheets – “the headwinds are strong”.

“Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence,” he said. “Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing.”

The hike in rates could worry households, said Sharon Zollner, ANZ’s chief economist, but she was confident that wage growth would eventually catch up.

Speaking to the AM show, she said: “It does seem quite mean to raise interest rates when households are already under so much cost of living pressure but the Reserve Bank is playing the long game.”

“If they don’t raise interest rates aggressively enough, then they could lose control of inflation expectations, lose credibility and then we’re really in a pickle.”