NEW ZEALAND (Commonwealth Union)_ New Zealand’s central bank has increased its key interest rate to the highest level in almost 13 years in order to combat rising costs. The Reserve Bank of New Zealand (RBNZ) raised its key interest rate by 0.75 percentage point to 4.25%. That was the largest increase since the official cash rate was created in 1999. It comes after the country’s annual inflation rate was 7.2% in the three months to September’s end.
As the global economy recovers from the pandemic and the war in Ukraine drives up the cost of fuel and food, New Zealand, like most of the rest of the world, has seen its cost of living skyrocket. According to the RBNZ’s latest predictions, the country’s economy will enter a recession in September of next year.
A recession is typically described as an economy contracting for two consecutive three-month periods – or quarters.
“An economic contraction is expected since the New Zealand economy is starting from a position of very high inflation and acute labour shortages,” the RBNZ said in a statement. “Attempting to avoid an economic contraction by limiting any interest rate increases in the near term would likely lead to a longer period of high inflation, resulting in higher interest rates and a larger contraction eventually being required to return inflation and employment to a more sustainable path,” it added.
ANZ economists applauded the central bank’s decision. “Hope is not a viable tactic. The RBNZ Monetary Policy Committee understands this and deserves credit for confronting the difficulties straight on. They will change their ideas if the facts change. But, for the time being, rising inflation appears to be entrenched, and delaying would exacerbate the problem,” ANZ Research stated in a note to investors.
During a parliamentary hearing on Wednesday, New Zealand Finance Minister Grant Robertson stated that the global economy would face a “year of reckoning” in 2023. “Countries will either be in or feel like they are in a recession,” he said.
The New Zealand dollar reached a three-month high against the US dollar following the RBNZ interest rate announcement before dropping slightly.