Yesterday, the Reserve Bank of New Zealand (RBNZ) announced its Official Cash Rate would be moved from 3.50% to 4.25%.
The announcement comes after RBA Governor Philip Lowe spoke about the importance of quickly bringing down inflation in Australia to prevent a recession, even if this required aggressive cash rate hikes.
“We have not ruled out returning to 50 basis point increases if necessary” Dr Lowe said.
This is the single biggest increase in the history of New Zealand's Reserve Bank, but the Monetary Policy Committee that made the decision said it’s a necessary step to bring inflation back to target levels.
“Core consumer price inflation is too high, employment is beyond its maximum sustainable level and near-term inflation expectations have risen,” Committee minutes read.
“The productive capacity of the economy is being constrained by broad-based labour shortages and wage pressures are evident.
“Aggregate demand continues to outstrip New Zealand’s capacity to supply goods and services, with a range of indicators continuing to signify broad inflation based pressure.”
Global consumer price inflation, other central banks tightening their own monetary poliicy, and the ongoing slowdown in global growth were all also cited as contributory factors to the decision.
However, the news from across the Tasman comes as annual inflation in New Zealand currently sits at 7.2% - it's marginally higher in Australia at 7.3%.
The cash rate in Australia is currently 2.85%.
RBNZ meeting minutes highlighted the importance of combatting inflation quickly, to prevent a prolonged period making continued inflation seem inevitable.
“[The Committee] highlighted that the longer actual inflation remains above the target band, the more likely it is that higher inflation expectations become embedded," minutes read.
This echoes the remarks of Dr Lowe, who said “bringing inflation down again after it becomes ingrained in people’s expectations is costly and almost certainly involves a recession.”
The RBA says Australia's inflation will peak at roughly 8% later this year before a gradual decline to just over 3% by the end of 2024.
However in the words of RBA Deputy Governor Michele Bullock, RBA forecasts have historically been inaccurate.
“As the past few years demonstrates, however, it is more often a question of how wrong the forecasts will be," Ms Bullock said earlier in November.
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