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New Zealand central bank sharply raises rates as war on inflation is far from over

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The Reserve Bank of New Zealand raised interest rates aggressively on Wednesday in response to stubborn inflation pressures, ignoring recent signals from some its global peers that the pace of policy tightening could slow.

The RBNZ raised its official cash rate by 75 basis points to 4.25%. The hike is a step up from the 50-basis-point increase in early October that took the rate to a seven-year high of 3.50%.

“The committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term,” RBNZ Gov. Adrian Orr said in a statement.

“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen,” he added.

The big rate increase follows news that inflation ran at 7.2% on year in the third quarter, well above what economists had expected. Wage growth is also accelerating in New Zealand, with the labor cost index up to 3.8% on year in the third quarter, compared with 3.4% in the second.

Both the Reserve Bank of Australia and the Bank of Canada have slowed the pace of policy tightening over recent months amid growing warnings about a rapidly slowing world economy, and fears that aggressive hikes could further topple house prices in both countries.

Questions are also being asked about what the U.S. Federal Reserve will do next after October inflation data came in well below expectations.

The RBNZ’s move comes despite signs of a rapid weakening in New Zealand house prices. Nationally, prices for homes were down 10.9% on year in October, and sales activity down 34.7%, according to the Real Estate Institute of New Zealand.

Economists say the RBNZ still needs to remain vigilant, given that the war on inflation is far from won.

“The RBNZ must remain hawkish, in a bid to soften inflation expectations. The war on inflation is ongoing. Although we are likely to have seen the peak in price rises, the path back to price stability is frustratingly awkward,” said Jarrod Kerr, chief economist at Kiwibank.


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