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New Zealand interest rate rise: Reserve Bank under pressure as inflation smashes expectations, nears 30-year high

By Fitri Wulandari

Edited by Vanessa Kintu

16:57, 23 November 2022

Reserve Bank of New Zealand exterior
The RBNZ’s Monetary Policy Committee meets seven times a year to discuss monetary policy – Photo: Shutterstock, Jon Lyall

The Reserve Bank of New Zealand (RBNZ) raised its policy rate by a record 75 basis points (bps) to 4.25% in a meeting on 23 November, as had been widely expected. 

However, the central bank of New Zealand’s tone turned more hawkish than its previous monetary policy meeting. It said that members of the RBNZ’s monetary policy committee considered options of 75 bps and 100 bps in the meeting to cool stubbornly high inflation.

The RBNZ also projected a bigger New Zealand interest rate rise in 2023 and beyond. Let’s take a closer look at New Zealand’s interest rate, historical data, and the latest projections on the RBNZ’s interest rate.

What are interest rates and how are they set up in New Zealand?

An interest rate is a fee or cost charged for borrowing money. It is also the revenue a customer receives when they save their money in a bank. In monetary policy, interest rates are a fee paid to commercial banks that hold money at a central bank.  

Since 1999, the RBNZ has used the Official Cash Rate (OCR) – an overnight interest rate – as its primary tool to keep inflation within the average target range of 1% to 3%.

When the RBNZ transacts with other banks, it uses an interest rate close to the OCR. As a result, it has an impact on the rates other banks offer their customers. 

The RBNZ’s Monetary Policy Committee (MPC) meets seven times a year to discuss and modify the OCR and broader monetary policy. 

The committee also meets to make arbitrary changes to the OCR in response to unforeseen developments. In the past, two such meetings have been held. The first occurred after the World Trade Centre attacks in New York City on 11 September 2001 and the second during the Covid-19 crisis in 2020.

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New Zealand interest rate history

New Zealand 5-year interest rate history

On 16 March 2020, New Zealand’s interest rates were cut to an all-time low of 0.25%, from 1% in February. In its statement, the RBNZ attributed this to the negative impact of Covid-19 on the country’s economy. 

New  Zealand's key interest rate remained at 0.25% until August 2021.

In October 2021, the rate was raised by 25 bps to 0.50% amid a recovering economy. This was followed by another 25 bps in November 2021. The two New Zealand interest rate hikes put the OCR at 0.75% by the end of 2021, as it scaled back monetary stimulus as the country’s economy showed signs of recovery.

However, in its October’s monetary policy report, the RBNZ noted there was a risk of supply shortages, higher transportation and oil prices, and other costs associated with rising costs. The bank anticipated Consumer Price Index (CPI) inflation to rise above 4% in the near future.

The inflation rate stood at 5.9% by December 2021, compared to 1.4% in December 2020, according to data from Stats NZ.

The RBNZ has ramped up its tightening cycle through 2022 as the rate of inflation accelerated beyond its target. As of 23 November, the bank has had seven rate hikes, adding a total of 350 bps to the current interest rates in New Zealand of 4.25% from 1% in February 2022.

Inflation has climbed to an annual rate of 7.2% in the three months ending September 2022, up from 5.9% in the three months ending December 2021.

According to New Zealand’s interest rate history data, the highest OCR since the key rate was introduced in 1999 was 8.25% in July 2007, during the financial crisis of 2007-2008.

Factors affecting New Zealand’s interest rates

Rising inflation rate, tight labour market and a weakening New Zealand dollar (NZD) are the main factors that affected the bank’s decision to keep its hawkish New Zealand’s interest rates.

Inflation rate hit the highest since 1990 

The inflation rate in September cooled from 7.3% in the quarter ended June. However it has risen at the quickest pace since Q2 1990, according to Stats NZ’s data. Housing and household utilities were the major contributors to accelerate September’s annual inflation, which increased by 8.7% year-on-year (YOY). 

In its November’s monetary policy report, the RBNZ noted that household spending remained high despite rising inflation. High employment, rising wages and savings built up during the pandemic had fuelled the robust consumption. 


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Import inflations from strong global demand and the Russia-Ukraine war have also continued to feed through the economy. While supply-chain bottlenecks are easing globally, they continue to cause delays in the production and delivery of some goods in New Zealand, raising overall costs.

The bank forecast New Zealand’s inflation rate could increase to 7.5% in the fourth quarter of 2022, before gradually easing to 5% by December 2023. The inflation rate was forecast to return to the midpoint target of 2% in September 2025. 

Tight labor market fuel inflation

The unemployment rate stood at 3.3% in Q3 2022, up from 3.2$ the previous quarter, but significantly lowered from 4.9% in December 2020, indicating very tight labour market. 

Acute labour shortages have constrained services and output in many industries, regions and skill types. In addition, worker shortages give employees with a greater ability to demand higher wages in response to increased living costs, according to RBNZ’s report.

Employers then passed-on the higher wages and other costs to consumers’ prices. 

“The tight labour market has seen workers being promoted, switching jobs or increasing their hours to boost household incomes, helping sustain continued growth in household spending,” the central bank said. 

“Pressure on available resources and increasing wages are contributing to high domestic inflation.”

The RBNZ forecast the unemployment rate could inch up to 3.6% in 2023, before dropping to 5% in 2024 and 5.7% in 2025. Higher interest rates were expected to reduce domestic demand which would open room for labor shortages to ease, the bank said.

New Zealand dollar depreciation

New Zealand dollar to US dollar live chart

Interest rate hikes in many of New Zealand’s trading partners, particularly the US, have continued to apply downward pressure on the country’s national currency. Lower prices for New Zealand’s commodity exports also reduced demand for the NZD.  

As of 23 November, the New Zealand Dollar/US dollar (NZD/USD) currency pair was trading at 0.61807, down about 10% YOY, as the US Federal Reserve’s (Fed) tightening cycle strengthened the greenback against the NZD.

ING Group’s FX Strategist Francesco Pesole wrote on 22 November, that global risks dynamics and China’s development news would remain the main factors steering NZD’s direction: 

“NZD/USD is at risk of falling back below 0.60 before the end of this year, while we target a gradual recovery to 0.64 throughout the whole of 2023.”

New Zealand interest rate outlook for 2023 and beyond

In the latest New Zealand interest rate news, the RBNZ surprised markets by forecasting that the OCR would peak at 5.5% by September 2023. This was an upward revision from a peak of 4.1% in September 2023 made in August’s monetary policy statement. 

The bank’s New Zealand’s interest rate outlook expected the OCR to stay unchanged at 5.5% until June 2024. The interest rate was projected to drop to 5.3% in December 2024 and 4.4% in December 2025.

“The 140bp upward revision to the forecast OCR peak is massive, but so too have been the upside surprises to inflation, inflation expectations, and the wage outlook in recent months,” analysts at ANZ Research wrote on 23 November. 

“But more important than the words is the OCR track, which, with a peak of 5.5%, sent a very clear message to the market – and mortgage holders: ‘Brace for impact’.”

ANZ Research’s New Zealand’s interest rate forecast projected a 75 bps hike in February 2023, a 50 bps hike in April and a 25 bps hike in May, taking the OCR to a peak of 5.75% in 2023.

“We see a bit more wage inflation than the RBNZ does, and think it will take longer for the unemployment rate to start rising meaningfully. But it’s a big upgrade, and although revisions to everyone’s OCR forecasts have been one-sided for a long time, we see the risks around a 5.75% peak as balanced,” wrote analysts at ANZ Research on 23 November.

Westpac Bank’s New Zealand interest rate predictions on 23 November saw a 75 bps increase in February followed by a 50 bps hike in April to bring OCR to a peak of 5.5%. RBNZ was expected to begin OCR cuts in early 2024, six months earlier than the bank previously estimated.

Trading Economics projected interest rates in New Zealand to average 5% in 2023, trending down to 4% in 2024, according to the service’s econometric models. 

The bottom line

The Reserve Bank of New Zealand and analysts expected OCR to drop by 2025 as inflation was projected to drop to the 2% midpoint target

Bear in mind that analysts’ predictions can be totally incorrect. Before trading, you should always do your own research, analysing the latest news, analyst commentary, fundamental and technical analysis. It should be noted that past performance does not guarantee future results. Also, never trade with money you can't afford to lose.

Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.


What is the current interest rate in New Zealand?

The current interest rate in New Zealand is 4.25%

Are interest rates likely to rise in New Zealand?

Analysts and the Reserve Bank of New Zealand expected New Zealand’s interest rate rise to continue until the middle of 2023.

What will interest rates be in 2023 in New Zealand?

RBNZ and Westpac forecast OCR to peak at 5.5% in 2023, while ANZ Research expected the policy rate to peak at 5.75%. Trading Economics’ projected interest rate in New Zealand to peak 5% in 2023

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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