RBNZ Forecasts Recession in 2023 as it Delivers Historic Supersized Rate Hike
The Reserve Bank of New Zealand (RBNZ) raised its benchmark interest rate by an unprecedented supersized rate hike of 75 basis points on Wednesday, accelerating its monetary tightening to rein in inflation.
The move lifted the Official Cash Rate to 4.25% from 3.5%. It was the biggest hike since the RBNZ introduced the OCR in 1999 and it took the benchmark to its highest level since 2008. The rate hike didn’t come as a surprise, however, with 15 of 21 economists surveyed by Bloomberg predicting the move.
The RBNZ, which had previously predicted the cash rate would peak at 4%, is now forecasting that the rate will continue to rise, peaking at 5.5% next year, and remaining at that level for about 15 months before dropping.
The decision was in contrast with some of its global peers, however, who are becoming more cautious about rate increases amid risks of a global recession. Policymakers had to make the aggressive decision because five straight 50-point hikes failed to curtail stronger-than-expected inflation and near-record low unemployment.
RBNZ Hints at More Hikes Ahead
RBNZ Governor Adrian Orr said that the bank’s sole target is to get the OCR to a point where inflation can be worn down.
“Our core inflation rate is too high,” Orr said in a press conference, adding that the central bank is “well down on the path of the tightening cycle.”
In a separate press release shortly after the decision, the RBNZ said, “Committee members agreed that monetary conditions needed to continue to tighten further.”
RBNZ Forecasts Recession in 2023
The RBNZ also forecast that the country will tip into recession in 2023.
“Inflation is no one’s friend,” Reserve Bank Governor Adrian Orr said in a press conference after the rate hike announcement. “In order to rid the country of inflation we need to reduce spending levels.”
In its monetary statement, the Reserve Bank was also forecasting a recession in 2023, stretching into 2024.
Orr said the bank was predicting a “shallow recession”, with GDP down roughly half a percentage point in the second quarter of 2023, and down around another 0.3 following on from there.
Rate Hike Source of Stress for Homeowners
The latest rate hike is likely to cause major concerns among New Zealand’s highly leveraged homeowners, many of whom are scheduled to refinance their mortgages at far higher interest rates than they had been paying, and have no short-term relief in sight.