As reported by Reuters, Reserve Bank of New Zealand (RBNZ) Governor Anna Breman said on Friday that interest rates would likely rise earlier and more than previously signaled to combat inflation.
At its May meeting on Wednesday, the RBNZ decided to keep the Official Cash Rate (OCR) unchanged at 2.25%. Three board members voted to raise interest rates by a quarter of a point, and three voted to leave rates unchanged.
“The Committee remains focused on ensuring inflation returns to target while avoiding unnecessary volatility in the economy,” Breman said. “Overall, the OCR rate is likely to increase earlier and more than previously signaled,” she added.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are to achieve and maintain price stability – achieved when inflation as measured by the Consumer Price Index (CPI) is between 1% and 3% – and to promote as sustainable employment as possible.
The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) decides on the appropriate level of the official cash rate (OCR) in accordance with its objectives. Once inflation exceeds the target, the bank will try to tame it by raising its key OCR, which will make it more high-priced for households and businesses to borrow money and thus frosty the economy. Higher interest rates are generally positive for the New Zealand dollar (NZD) because they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is crucial to the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest utilization of the labor force that can be maintained over time without causing an acceleration of inflation. “When employment reaches the maximum sustainable level, inflation will be low and stable. However, if employment remains above the maximum sustainable level for too long, it will ultimately cause prices to rise faster and faster, requiring the Monetary Policy Council to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) may introduce a monetary policy tool called quantitative easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions to raise the domestic money supply and stimulate economic activity. QE usually results in a weakening of the New Zealand dollar (NZD). QE is a last resort when lowering interest rates alone will not achieve the central bank’s goals. The RBNZ has used it during the Covid-19 pandemic.
