RBNZ Steps Up Inflation Fight With Rate Hike

2/2 © Bloomberg. The Reserve Bank of New Zealand (RBNZ) headquarters stands in Wellington, New Zealand, on Thursday, Aug. 9, 2018. New Zealand's central bank said it expects to keep interest rates at a record low for another two years as the outlook for economic growth weakens. Photographer: Birgit Krippner/Bloomberg 2/2

(Bloomberg) -- New Zealand’s central bank raised interest rates by half a percentage point for a second straight meeting and forecast more aggressive hikes to come to tame inflation.

The Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 2% from 1.5% Wednesday in Wellington, as expected by 19 of 22 economists in a Bloomberg survey. It projected the OCR will rise to at least 3.25% this year and peak at close to 4% in 2023, higher than previously forecast. 

“It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,” the RBNZ said. “The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1-3% target.” 

It’s the first time the RBNZ has delivered back-to-back half-point increases since the OCR was introduced in 1999, and takes its tightening since October to 175 basis points. The bank is trying to rein in inflation expectations, which have climbed above the top of its target range. The risk is that it applies the brakes on the economy too quickly, creating recessionary conditions as high borrowing costs hammer the housing market and damp consumer spending.

The New Zealand dollar jumped more than half a US cent after the decision. It bought 64.95 cents at 2:06 p.m. in Wellington. 

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