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New Zealand delivers record rate increase, flags more to come

Official cash rate goes up to 4.25%, its highest point since January 2009

The Reserve Bank of New Zealand, headquartered in central Wellington, raised its policy rate by 75 basis points on Nov. 23.   © Reuters

WELLINGTON (Reuters) -- New Zealand's central bank on Wednesday delivered its biggest interest rate hike and outlined a more hawkish monetary tightening path in coming months as it tries to rein in stubbornly high inflation.

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 75 basis points to 4.25%, its highest since January 2009.

The RBNZ also increased the projected peak for the cash rate to 5.5% in September 2023 where it expects it to remain into 2024.

"The OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term," the RBNZ said in a statement.

Fifteen of 23 economists polled by Reuters had expected the central bank's policy committee to lift the cash rate by 75 basis points, but there was some division about where rates would peak and if it might need to cut them next year.

Markets were quick to price in a change in rate expectations.

The projected peak of 5.5% for rates was well above even the most hawkish market wager and saw key two-year swap rates NZDSM3NB2Y= surge 29 basis points at 5.285%, the biggest daily jump since 2009.

The kiwi dollar climbed 0.6% to $0.6178 toward its recent three-month high of $0.6204.

"The statement was very hawkish, noting inflation was too high, that employment was above its maximum capacity, and that near-term inflation expectations had increased," said Capital Economics in a note.

It added that the OCR is likely to peak above Capital Economics' existing forecast of 5.0%, but that it still expects inflation to moderate faster than the bank anticipates.

The RBNZ has remained more hawkish than its Australian counterpart, which has slowed its rate increases in recent months.

Wednesday's ninth straight hike means the cash rate has now risen 400 basis points since October 2021 and is the most aggressive tightening by the central bank since 1999 when the cash rate was introduced.

But with inflation at just below three-decade highs and the central bank pursuing what it refers to as the "path of least regrets," some economists expect the cash rate could get to 5.25% in the first half of next year.

Worrying the bank is non-tradeable inflation -- or prices for goods that are not exposed to global markets -- which is running at a record. There are also signs wage pressures are heating up while inflation expectations have shown no signs of slowing.

"The Reserve Bank finds itself facing the real risk of an inflationary spiral -- the very situation it had hoped to prevent with its relatively early start on hiking interest rates," said Westpac acting chief economist Michael Gordon in a note.

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