New Zealand Cash Rate Raised to 3 Percent as Inflation Continues to Climb

People walk on a street in Wellington, New Zealand, on May 14, 2020. (Marty Melville/AFP via Getty Images)

The Reserve Bank of New Zealand (RBNZ) has raised the cash rate by 50 basis points to three percent and warned of risks associated with continued high levels of government spending.

After inflation hit a 32-year high of 7.3 percent, the central bank made its fourth consecutive 50 points hike of the year, bringing the official cash rate to a seven-year high.

“The [monetary policy] committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment,” the committee said in a statement. “Core consumer price inflation remains too high, and labour resources remain scarce.”

The committee noted several concerns, including continued acute labour shortages, heightened wage pressures, and high inflation levels in most advanced economies.

Higher interest rates have also influenced the weakening of the New Zealand dollar, making imports more expensive.

It also signalled to the central government to rein in stimulus spending due to high inflation pushing up the costs of such schemes.

“The committee discussed the outlook for fiscal policy and noted upside risks to overall government spending due to the rising cost of delivering government services,” it said.

Despite the pressures, the committee expects the current pace of hikes to return inflation back to its one to three percent target range by mid-2024.

“But this will require a better balance between supply and demand,” the committee noted.

Reserve Bank Governor Adrian Orr speaks during a press conference at the Reserve Bank of New Zealand, in Wellington, New Zealand, on March 16, 2020. (Hagen Hopkins/Getty Images)

Bank of New Zealand Head of Research Stephen Toplis said the hike signalled the Reserve Bank’s decision to put a “nail in the coffin” of inflation.

“It senses that the battle has nearly been won but is terrified that inflation might sneak away if given the slightest chance,” he said (pdf).

“Consequently, not only did it raise its cash rate by 50 basis points to 3 percent today, but it also appeared to cement in a further 50 point rise in October and a very strong likelihood of yet another 50 points in November.”

Calls to Rein in Government Spending

The New Zealand National Party called the latest hike a “massive blow” to homeowners.

“Runaway prices are crushing household budgets. Rapidly rising interest rates are crushing mortgage-holders. Today’s statement confirms both these things are set to persist for many months ahead,” National’s Finance Spokesperson Nicola Willis said.

Willis called on the Ardern government to fix broken immigration settings and stop “runaway spending” to bring inflation under control.

ACT Party Leader David Seymour similarly blamed the Labour government’s spending as a major driver of inflation.

“Today more pain has been heaped on Kiwis already struggling with a cost of living crisis. It could have been avoided if the government had disciplined its spending,” he said.

Meanwhile, Finance Minister Grant Robertson instead celebrated the highest wage growth, which jumped to 8.8 percent in the year to the June quarter, according to Stats NZ.

“This is an extremely positive result and shows our economic plan is working despite a challenging global environment,” he said in a media release.

“We have taken action to ease cost of living pressures on households, particularly those on lower incomes. We are also taking action to ensure New Zealanders are paying a fair price at the petrol pump, supermarket checkout, and hardware store.”