The results of the May meeting of the Reserve Bank of New Zealand (RBNZ) showed that policymakers decided to increase the interest rate to 2% from 1.5%. Commenting on such a move, policymakers said that raising the rate reduces the risk that inflation will become persistent, and also provides greater policy flexibility in the future.
Meanwhile, the RBNZ signaled that the degree and timing of further tightening of monetary policy will depend on the economic outlook. However, according to RBNZ forecasts, the interest rate will rise to 3.5% by December 2022 and will peak at about 4% in 2023. This implies at least two more 0.5% rate hikes this year.
"Although the country's economy continues to demonstrate resilience against the backdrop of a strong labor market, stable household balances and favorable terms of trade, there are still serious constraints," the RBNZ noted, adding that increased global economic uncertainty and a sharp rise in prices negatively affect consumer confidence.
Regarding the inflation outlook, the RBNZ expects the CPI to peak at 7% in mid-2022, well above the 1%-3% target, but fall to 5.5% by December and return to the target range by the end of next year. According to official data, in the 1st quarter, the CPI increased by 6.9% per annum compared with an increase of 5.9% per annum in the 4th quarter of 2021.