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New Zealand interest rate forecast: Will RBNZ continue to be global tightening leader?

By Fitri Wulandari

Edited by Georgy Istigechev

15:57, 29 August 2022

Reserve Bank of New Zealand building.
New Zealand’s central bank has hiked interest rates earlier than other developed nations — Photo: jon lyall / Shutterstock

On 17 August, the Reserve Bank of New Zealand (RBNZ) hiked its benchmark interest rate to 3% as it struggled to contain soaring inflation. Rising house prices and acute labour shortages have pushed annual inflation in Q3 2022 to a 32-year high. 

With labour shortages adding pressure to inflation, what is the interest rate forecast in New Zealand for the next five years?

New Zealand has been leading the global monetary tightening cycle by rising rates earlier than other developed nations. We examine the country’s interest rate history and economic indicators to see whether New Zealand will retain its lead in spearheading monetary contraction.

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the central bank of New Zealand. It was founded on 1 April 1934 through the enactment of the Reserve Bank Act. 

In the early days, the bank was partly privately owned, with its main role restricted to maintaining exchange rate stability. In 1935, a newly elected Labour government nationalised the bank and authorised it to underwrite loans. 

The bank’s functions expanded over the years in line with the Act’s amendments. Significant reform took place in 1964, when the bank was tasked with using monetary policy to promote growth, employment and other economic goals. 

By 2009, the RBNZ had a complete set of policy tools at its disposal. These included carrying out monetary policy, supervising the financial system, conducting financial market operations, providing clearing and settlement services, managing and monitoring the liquidity in the banking system, and issuing money to the general public.

The bank’s Monetary Policy Committee (MPC) formulates policy to achieve price stability over the medium term and support maximum sustainable employment. 

In 1999, the Bank introduced the Official Cash Rate (OCR) as its main tool to keep inflation within its average target of between 1% and 3%. It works to keep average inflation near the 2% target midpoint.

The MPC meets seven times a year to discuss and modify the OCR and broader monetary policy. The body also meets to make arbitrary changes to the OCR in response to unforeseen developments.

According to the bank, these meetings have taken place twice. The first came after the World Trade Centre attacks in New York on 11 September 2001. The second followed the Covid-19 crisis in 2020.

History of RBNZ monetary policy

According to data on the New Zealand interest rate history, the bank's highest OCR since the key rate was established in 1999 was 8.25 percent in July 2007. That was during the global financial crisis 2007-2008 brought on by the US housing bubble.

The Reserve Bank of New Zealand’s interest rate was kept at 8.25% for about a year, from July 2007 to June 2008. 

The lowest OCR rate that the MPC had set was 0.25% during the Covid-19 crisis in 2020. In March 2020, New Zealand’s interest rate was cut by 75 basis points (bp), lowering the OCR to 0.25% from 1% in February 2020 as the negative impact of Covid-19 on the country’s economy rose, the bank said in its statement. The RBNZ kept the key New Zealand interest rate unchanged at 0.25% until August 2021.

In October 2021, the bank started to ease its monetary stimulus, raising the Reserve Bank of New Zealand interest rate by 25bp to 0.50% as the economy showed signs of recovery.

However, the bank noticed risks from rising costs coming from higher oil prices and transportation costs, and supply shortfalls. At that time, the RBNZ expected inflation to increase above 4% in the near term. 

The bank lifted the OCR by another 25bp in November 2021, bringing the interest rate to 0.75% by the end of 2021. 

Since February 2022, as of 29 August, the bank has increased the New Zealand interest rate five times — four of the hikes at 50bp. The series of rate increases took the OCR to 3% at the bank’s latest 17 August meeting, up from 1% in February.

Drivers for RBNZ monetary decision

Inflation, unemployment and the country’s economic growth are factors that the bank usually looks for to adjust the New Zealand interest rate. Let’s look at how these have developed this year. 

Inflation seen easing

Inflation in New Zealand climbed to 7.3% in the second quarter to June 2022 – the largest annual increase in 32 years, according to the country’s statistics office, Stats NZ.

It was more than double the bank’s inflation target of a maximum of 3%. The June 2022 quarter inflation was also higher compared to 6.9% in the first quarter of 2022 and 3.3% in the second quarter of 2021, as shown in the chart. 

Housing and household utilities — mainly rising prices for construction and rentals for housing — are the main drivers for the 7.3% annual inflation up to the June 2022 quarter, Stats NZ said. 

In its monetary policy statement in August, the RBNZ forecast annual CPI inflation to decline to 6.4% in Q4 2022. Over 2023, the bank has projected annual headline inflation to gradually drop, returning to the top of the 1%-to-3% target band by early 2024.

The bank’s Survey of Expectations, which polled 35 business leaders and forecasters and was released on 8 August, forecast inflation to decline to 4.86% in one year and 3.07% in two years. The five-year inflation expectation was set at 2.33%. 

ANZ Research expected inflation in New Zealand to come down to 6.7% in September and 6.1% in December 2022. Inflation is forecast to continue its downward trajectory until it falls within the bank’s target at 2.5% in December 2023 and 2.3% in March 2024.

Unemployment rate adds pressure to inflation

Acute labour shortages have kept New Zealand’s unemployment rate low. Stats NZ announced on 3 August that the annual unemployment rate stood at 3.3% in Q3 2022 – practically unchanged from 3.2% in Q2 2022. 

In August's monetary policy statement, the RBNZ attributed labour shortages to higher-than-usual levels of sickness from Covid-19 and other illnesses, as well as an outflow of New Zealanders heading overseas following the reopening of the country’s border. 

“A very tight labour market is adding to high consumer price index (CPI) inflation, with wage growth continuing to increase as businesses compete to attract or retain staff,” the bank said in the statement. 

The bank’s survey expected one-year-ahead unemployment to increase to 3.77% and to 4.31% in two years. 

On 26 August, ANZ Research forecast New Zealand’s unemployment rate to rise to 3.4% in December 2022 and remain steady at that level in the first quarter of 2023. The unemployment rate is expected to pick up to 4% in Q4 2023, rising further to 4.8% in Q1 2024. 


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GDP growth seen slowing

The country’s economy grew by 5.1% in the first quarter of 2022, but fell by 0.2% on a quarterly basis from 3% to December 2021, according to Stats NZ. The drop was primarily due to a decrease in primary industry’s gross domestic products (GDP).

New Zealand’s central bank forecast the country’s GDP growth to slow to 3.9% in 2023, from an estimated 5.4% in 2022. It expected the GDP to have 0.6% contraction in 2024 before rebounding to 0.7% in 2025.

The RBNZ’s Survey of Expectations projected GDP growth to reach 1.49% in a year and achieve 1.89% annual growth in the June 2024 quarter. 

“The economy is then expected to grow faster in the year after, though still slower than what was previously expected two years ahead,” the survey said. 

ANZ Research forecast New Zealand’s GDP to grow by 4.4% in the September 2022 quarter, slowing to 2.2% in the December quarter. The country’s GDP growth picked up slightly to 2.8% in the March 2023 quarter before gradually declining to 1% in the March quarter of 2024.

Impact on NZD/USD

While the RBNZ’s interest rate policy has a direct impact on New Zealand’s national currency, the NZD/USD rate has lately been strongly influenced by announcements from the US Federal Reserve (Fed).

NZD/USD live chart

On 10 August, Netherlands-based ING Group’s research arm THINK weighed in on the prospects for the NZD/USD rate in the upcoming months, noting:

“While the Kiwi dollar can continue to count on the most attractive carry in the G10, we suspect more instability in global risk sentiment may delay any benefits for high-yielding currencies to 4Q or the start of 2023.”
“We think NZD/USD could sink back to 0.62 by the end of this quarter, before starting to turn higher later this year and touch 0.64 by year-end.”

Roger J. Kerr, Executive Chairman of investment firm Barrington Treasury Services, recently said that the NZD/USD rate is dominated by the decisions made by the Fed, with local factors, such as labour shortages and low consumer confidence, being practically irrelevant:

“The NZD/USD exchange rate has plunged back to the low of 0.6140, last seen in June, following the speech at Jackson Hole by US Federal Reserve Governor, Jerome Powell on Friday 26th August.

“The Kiwi dollar was hit hard by the ‘risk aversion’ investment market sentiment as the Dow Jones index on the US equities market dropped over 1,000 points on the day following the Powell speech.

“Whilst the NZ economy paints a decidedly negative picture, the NZ dollar value is unlikely to suffer as a result as there has been absolutely no offshore interest in the Kiwi for quite some time. The NZD/USD exchange rate movement will continue to be dominated by the USD side and the local NZ economic factors will continue to be totally irrelevant.”

NZD/USF 5-year Price Chart

RBNZ interest rate forecast: 2002 Target and beyond

What are the long-term New Zealand interest rate predictions from analysts and the RBNZ?

In its Asia Economic Weekly outlook on 26 August, Bank of America (BofA) predicted New Zealand interest rates to rise by 50bp when the central bank’s MPC convenes in October, and another 50bp hike in November, taking New Zealand’s interest rate to 4% by end of the year. 

BofA expected the RBNZ to put any rate adjustment on hold in 2023. The bank also forecast a significant slowdown in the country’s economic growth as tighter financial conditions gain traction, slowing the pace of household and business spending growth. 

“Ongoing capacity constraints and high inflation are unlikely to be resolved soon. Yet there is increased uncertainty around the global and domestic economic outlook. With domestic demand holding up relatively well outside of the housing market, there is increased risk for the hiking cycle to be extended into 2023,” the bank said in the note. 

In its New Zealand interest rate outlook on 26 August, ANZ Research forecast the RBNZ to increase OCR to 4% by December 2022 and hold the rate at that level until December 2023.

ANZ had previously forecast that the bank may cut the OCR from a peak of 4% in the second half of 2024 to 3.5% in the fourth quarter 2024m but it has removed the rate cut in the latest estimate. 

ANZ noted:

“While obviously what 2024 looks like is subject to extreme uncertainty, we’ve now taken those cuts out of our forecast, to make it consistent with our current thinking. We continue to expect the RBNZ to lift the OCR to a peak of 4% by year-end, though we see the risk profile tilted to more. But we no longer expect the RBNZ will be cutting the OCR over the duration of our forecast horizon (barring some miraculous recovery in the supply-side of the economy, or some unforecastable shock hitting the economy).”

In its August monetary policy statement, the RBNZ estimated that it may hike the OCR to 3.7% by December 2022 and 4% by Q1 2023. The OCR may be lifted to 4.1% in Q2 2023 and held there until the second half of 2024, before being lowered to 3.6% in September 2025.

The National Australia Bank (NAB) has predicted that the New Zealand interest rate will be lifted to 3.5% by December 2022 and stay at that level until September 2023. The RBNZ is forecast to cut the key rate to 3.25% in December 2023 and continue to gradually lower it to 2.25% in December 2024, according to NAB’s forecast.

ANZ, BofA and the RBNZ did not offer forecasts beyond 2025.

Australian lender Westpac predicted interest rates in New Zealand to rise in the short term, forecasting the RBNZ to lift the OCR to 4% by the end of 2022, from 3% in the Q3 2022.

The bank predicted that the interest rate in New Zealand may be held at 4% until the second quarter of 2024, before the country’s central bank cuts the rate in the third quarter to 3.5%, continuing to lower the OCR until it reaches 2% in December 2025. 

The RBNZ is forecast to pause any adjustment on the OCR and keep the rate at 2% until the end of 2028.

Final thoughts

Forecasts in this article showed that the Reserve Bank of  New Zealand could raise the interest rate to 4% by the end of the year, before lowering it in the long term as inflation pressure is expected to ease.

Remember that analysts’ predictions can be wrong. You should always conduct your own research before trading, looking at the latest news, analyst commentary, fundamental and technical analysis. Note that past performance does not guarantee future returns. And never trade money you cannot afford to lose.


What is the interest rate in New Zealand?

The Reserve Bank of New Zealand’s official cash rate (OCR) stood at 3% after a 50bp rate hike on 17 August. The rate may change in following meetings.

Are NZ interest rates going to rise?

Forecasts from banks mentioned in this article showed that the New Zealand interest rate could fall in the long term as inflation pressures are expected to ease. Note that analysts’ forecasts can be wrong. Always do your own research.

Where will NZ interest rates be in 5 years?

Australian lender Westpac has estimated the NZ interest rate to stand at 2% by December 2028. Keep in mind that their projection can be subject to error.

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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.
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