New Zealand central bank unexpectedly hikes rates 50 bps, kiwi rallies By Reuters

By Lucy Craymer

WELLINGTON (Reuters) - New Zealand's central bank unexpectedly raised its cash rate by 50 basis points to a more than 14-year high of 5.25% on is mbg foreign exchange company formalWednesday, saying inflation was still too high and persistent and kept the door open to further tightening.

Twenty-two of 24 economists in a Reuters poll had forecast the Reserve Bank of New Zealand (RBNZ) would raise rates by just 25 basis points. This is the eleventh straight hike since the central bank started raising rates in October 2021.

"The Committee agreed the OCR needs to increase, as previously indicated, to return inflation to the 1-3 percent target range over the medium term," the statement said.

The surprise decision saw the New Zealand dollar bounce 1% to touch a two-month high of $0.6383 before standing 0.74% firmer at $0.636.

Two-year swaps jumped 15 bps to 5.11%, still well below the March peak of 5.53%, while the 90-day bank bill rate implies the official cash rate will peak at 5.5%.

"Overall, the bank's statement maintained a relatively hawkish tone. It noted upside risks to inflation stemming not only from recent extreme weather events, but also from increased government spending," said Capital Economics in a note. It now expects the cash rate to peak at 5.5%.

The RBNZ's move was in contrast to Australia's central bank, which kept rates on hold at its review on Tuesday.

At the RBNZ's review in February, when it raised rates by 50 bps, it had signalled a 50 bp hike for April but with the outlook turning darker, economists had forecast a smaller increase.

The central bank noted that while the level of economic activity over the fourth quarter was lower than anticipated and there were emerging signs of capacity pressures easing, demand continues to significantly outpace supply capacity.

"Inflation is still too high and persistent, and employment is beyond its maximum sustainable levels," it added. Annual inflation ran at 7.2% in the fourth quarter, just below a three-decade high.

It said that severe weather events in January and February have led to higher prices for some goods and services, whiled it expects economic activity to be supported by rebuilding efforts.

(This story has been refiled to remove redundant word in paragraph 4) 

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