NZ set for first rate hike in seven years

Ben McKayAAP
New Zealand's Reserve Bank is expected to lift the official cash rate this week.
Camera IconNew Zealand's Reserve Bank is expected to lift the official cash rate this week. Credit: AP

New Zealand's central bank is likely to raise interest rates for the first time in seven years, even as the country's biggest city notches 50 days in lockdown.

The Reserve Bank of New Zealand's monetary policy committee meets this week, and is expected on Wednesday to lift the official cash rate (OCR) from the emergency 0.25 per cent level.

If it does so, it will be the first change since March 2020, when the RBNZ cut 75 points in response to the arrival of COVID-19 to Kiwi shores.

Governor Adrian Orr was expected to raise rates at the last meeting in August, however, the RBNZ was spooked when New Zealand's first community case of COVID-19 in months was announced the previous day.

This time around, Kiwibank chief economist Jarrod Kerr expects Mr Orr to pull the trigger.

"The economy took significant momentum into lockdown (including) supercharged growth of 2.8 per cent in the June quarter," he said.

"Labour shortages, supply-chain and capacity issues all point to rising inflation well above the RBNZ's 2 per cent target midpoint. And the housing market has continued to flash red with record price growth."

A 25 basis point lift has been priced in by markets, and economist are forecasting several hikes in 2022.

New Zealand's successful elimination strategy has largely inoculated Kiwis economically from the worst of COVID-19.

Inflation is running at 3.3 per cent, above the reserve bank's target band, and unemployment remains low at 4.0 per cent.

ANZ New Zealand chief economist told the NZ Herald it was "a weird old time" for the economy but she still expected the bank to move.

"The RBNZ has made it clear that they do not view lockdowns as a reason not to hike the OCR," she said.

Not since July 2014 - 51 meetings ago - has the RBNZ raised the cash rate.

Then, reserve bank governor Graeme Wheeler hiked by 25 basis points to 3.5 per cent as inflation reached 3.7 per cent, noting increased construction in Canterbury from earthquake reconstruction work.

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