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New Zealand’s central bank has raised interest rates for the first time in three years and indicated that future increases were expected as the Pacific country moves to tackle persistent inflation.
The Reserve Bank of New Zealand on Wednesday pushed up rates by 0.25 percentage points to 2.5 per cent — its first rise since 2023 — after it warned that the effects of the energy price shock from the war in Iran could linger for some time.
“The outlook for medium-term inflation pressures remains uncertain,” the bank said.
The RBNZ said it expected annual headline inflation to have peaked at 3.9 per cent in the June quarter and projected a decline to 3.3 per cent in the quarter to September. The bank targets inflation in a band of 1 per cent to 3 per cent.
The July meeting was the first significant test for Anna Breman, the Swedish central banker who was appointed governor of the RBNZ late last year. Opinion was divided over whether a rise in borrowing costs could threaten a recovery in the economy, which has struggled to maintain growth.
The New Zealand dollar gained 0.4 per cent against the US dollar to US$0.57.
The RBNZ also noted that oil futures were priced significantly below assumptions made two months ago, in the middle of the US-Israeli war against Iran.
The bank said that it was appropriate to start reducing financial stimulus as lower fuel prices would support a recovery in spending. It pointed to rising business confidence and said it expected GDP to expand 0.6 per cent in the September quarter.
New Zealand was one of the first countries to start increasing interest rates following the pandemic as inflation started to soar in 2021.
It has taken a more cautious approach in the current cycle as other central banks, including the Reserve Bank of Australia, have raised rates to stem a growing tide of inflation.
Additional reporting by William Sandlund in Hong Kong
