New Zealand Delivers Record Rate Hike to Fight Inflation, Flags 2023 Recession

Facts

• New Zealand's Reserve Bank (RBNZ) on Tuesday announced a raise in the official cash rate (OCR) by 75 basis points to 4.25%, as it steps up to fight inflation. According to Adrian Orr, the Reserve Bank's Gov., the rate remains "well above the 1 to 3% target range."
• The increase is the biggest rate hike since the OCR was introduced in 1999, and takes the benchmark to its highest level since 2008. The RBNZ predicts annual inflation will accelerate to 7.5% in the final quarter of 2022 and will not return to the midpoint of the target until late 2025.
• This comes even as other economies are scaling back monetary tightening, with the US Federal Reserve in recent weeks supporting a reduction in the pace of interest rates as inflation eases, and Australia increasing rates by just 25 basis points in each of its last two monetary policy meetings.
• The RBNZ has stated that higher interest rates are expected to play a part in New Zealand's economic contraction in 2023, but claimed they are necessary to reduce inflation and return employment to a sustainable level.
• According to the committee, limiting any interest rate increases in the short term to prevent a recession — which New Zealand is projected to enter from mid-2023 — would likely lead to a longer period of inflation.
• The RBNZ is set to closely watch the data, in order to assess whether its hawkish tone remains appropriate. Studying emerging figures will also help the committee inform its next decision, which is scheduled to be taken in three months. It has so far risen the cash rate by 400 basis points since October 2021.

Sources: Stuff, Bloomberg, FT, 1 News, Nzherald, and Reuters.

Narratives

• Narrative A, as provided by FT. New Zealand's decision to speed up monetary tightening is a temporary, inflation-tackling measure and — based on the accuracy of the RBNZ's forecasts of the emergence and persistence of previous episodes of inflationary pressure — should serve as a warning to the world. The Reserve Bank has employed this orthodox tactic amid historic downturn — other economists should take note.
• Narrative B, as provided by Guardian. New Zealand has followed the conventional wisdom of raising interest rates to tackle inflation, but this very economic practice is currently being questioned in countries like the US, as some economists argue that the strategy puts excessive pressure on domestic consumers and businesses. While internationally driven prices are transitorily boosting inflation, hiking rates risk prolonging the problem by driving up prices.

Predictions