WELLINGTON (Reuters) New Zealand's central bank delivered a third straight interest rate hike on Wednesday that took borrowing costs back to pre-pandemic levels and signaled a more aggressive tightening path to counter rising inflation.
In a Reuters poll, all but one of the 20 economists predicted the Reserve Bank of New Zealand's (RBNZ) 25-basis point hike in the official cash rate (OCR) to 1.0%. One poll respondent expected a 50-basis point hike.
While markets had priced in the 25-basis point hike, the bank's forecast for a higher peak in the tightening cycle sounded a hawkish signal that sent the New Zealand dollar soaring.
The RBNZ also revealed plans to wind down its NZ$50 billion ($33.82 billion) bond holdings acquired under the Large Scale Asset Purchase (LSAP) program through bond maturities and managed sales.
The RBNZ said it would not reinvest the proceeds of the maturing bonds and plans to reduce such holdings at a pace of $5 billion a year.
ANZ Bank chief economist for New Zealand Sharon Zollner said RBNZ's tone was hawkish, with downside risks to growth getting a lot less airplay than upside risks to inflation.
"Headwinds for economic activity are clear, but the OCR nonetheless needs to be raised in a pretty relentless fashion if the credibility of the inflation target is to be maintained," Zollner said in a note. "Buckle (NYSE:BKE) up; it could be a rough ride."
The central bank lifted the projected OCR track to 3.35% by the end of 2024, much higher than the 2.6% endpoint prediction released in November.
Markets now see rates reaching 2.5% by year-end, up from 2.25% previously, while two-year swap rates surged 12 basis points to 2.695% and heights last visited in early 2016. [RBNZWATCH]
The RBNZ said it came close to moving ahead with a 50 basis point hike, and at a news conference later, Governor Adrian Orr did not rule it out in the future, highlighting the need for rates to rise significantly.
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"We will not rule out larger moves in the future... but it is a function of how the markets respond," Orr said.
In a record of the meeting, the committee noted that a 50-basis point OCR move was strongly considered, and members saw this as a "finely balanced decision."
The RBNZ hiked rates at its last two meetings and signaled further tightening as it looked to cool a heated economy.
Global supply constraints pushed New Zealand's inflation to 5.9%, almost double the top of the bank's 1-3% target range, while the jobless rate has hit a record low of 3.2%. House prices have also soared to historic highs.
But uncertainties remain over the outlook as the Omicron variant spreads rapidly through New Zealand. The market braces for any global economic fallout from potential conflict in Ukraine.
($1 = 1.4786 New Zealand dollars)