NZ raises rates to rein in property prices and inflation worries

New Zealand has raised interest rates for the first time in seven years as concerns over rising property prices and inflation outweigh the importance of the Pacific nation’s battle to control the spread of the coronavirus.

The Reserve Bank of New Zealand became the third central bank of a developed economy to raise rates since the pandemic began, the latest indication of an acceleration of the global tightening of pandemic-era monetary stimulus.

The RBNZ raised the country’s benchmark lending rate by 25 basis points to 0.5 per cent on Wednesday and signalled that more tightening was likely.

The central bank increased rates despite fears over greater economic damage as Auckland, the country’s biggest city, and several surrounding areas remained under strict lockdowns. Health officials are struggling to control an outbreak of the highly contagious Delta variant.

“Further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment,” the RBNZ said.

The current virus restrictions had not “materially changed the medium-term outlook for inflation and employment”, the bank continued, adding that inflationary pressures had risen around the world owing to an economic recovery brought about by vaccine rollouts and stimulus measures.

The RBNZ predicted headline consumer price index inflation to reach more than 4 per cent in the short term before settling down to 2 per cent. The New Zealand dollar fell slightly by 0.5 per cent against the US dollar to 0.69 on Wednesday.

The bank added that house prices in the country had become “unsustainable” and that the tightening measures, as well as higher mortgage rates, would help avoid sharp crashes.

New Zealand has kept cases of Covid-19 extremely low by enforcing some of the strictest antivirus measures in the world. The whole country was put under lockdown in August when one case of the Delta variant was discovered. That lockdown has been eased incrementally but strict curbs remain in Auckland.

While New Zealand has said it will move away from a Covid-elimination strategy, just 42 per cent of residents have received two vaccine doses, lagging behind the rest of the developed world. The are 350 active coronavirus cases in New Zealand, which reported 39 new infections on Wednesday.

The RBNZ delayed plans to raise rates in August, on the same day that lockdowns were brought in nationwide to combat a Covid outbreak.

Analysts at ANZ and Capital Economics, who on Wednesday predicted the RBNZ would further raise rates up to 1.5 per cent by August next year, said the move suggested that the bank was concerned about an overheating economy despite the persistence of pandemic restrictions.

“The RBNZ could have sounded more ‘dovish’ today. The pain Auckland businesses are going through warranted a mention but clearly isn’t seen as significant enough to derail momentum,” said Sharon Zollner, chief economist at ANZ. “The risks in our view are skewed towards the RBNZ simply running out of runway before completing their hiking cycle.”

Ben Udy, Australia and New Zealand economist at Capital Economics, added: “Unlike the RBNZ and financial markets, we think a slowdown in the domestic economy next year will cause the bank to end its hiking cycle there.”

The RBNZ’s decision followed moves by the central banks of South Korea and Norway to increase rates in recent months as concern over inflation begins to trump willingness to extend monetary stimulus.

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