New Zealand’s central bank has increased interest rates to a seven-year high following the fifth consecutive bumper rate hike. The Reserve Bank of New Zealand (RBNZ) has increased the base rate by 0.5% as it struggles to bring inflation under control. In addition, the bank has warned of more interest rate misery to come.
Borrowers with variable-rate mortgages are already under considerable strain as they struggle with rising repayments. The latest increase, coupled with the warning about ongoing hikes, will cause concern for borrowers and businesses affected by the rising base rate. The bank announced the increase on Wednesday, and the official cash rate now stands at 3.5%.
The rate hike could have been higher
There are reports that while this is undoubtedly another significant increase from the central bank, it could have been higher. It is claimed that the bank’s policy committee did consider a rise of 0.75%, which would have caused even more financial strain for those affected.
In a statement, RBNZ Governor Adrian Orr said: “The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labour resources are scarce.”
Financial markets are now expecting a further super-size rate increase of 0.5% in November from the RBNZ, and it is thought that rates could peak at 4.5% by May.
Jarrod Kerr, the chief economist at Kiwibank, spoke about the central bank governor’s statement following the latest rate increase.
He said: “The statement was punchy and hawkish, and highlighted the need to demand-destruct inflation back to target. More rate rises are required for mandates to be met.” He added. “We continue to forecast a peak in this cycle of 4.0 percent. Although the risk is clearly tilted towards even more policy tightening to 4.5 percent.”
Kerr also said that banks were still catching up in terms of increasing mortgage rates in line with the base rate hike. He said this would be a financial shock to many once implemented and would put a massive burden on households over the coming months.
As more people struggle with mortgage repayments, consumer spending and demand will naturally take a hit, which is another concern. During the second quarter of this year, inflation reached its highest level in three decades and is set to increase further. This will further pressure the central bank to continue tightening monetary policy and hiking interest rates.