New Zealand Delivers Record Rate Hike to Fight Inflation, Flags 2023 Recession
The Facts
New Zealand's Reserve Bank (RBNZ) on Tuesday announced a raise in the official cash rate (OCR) by 75 basis points to 4.25%, as it steps up to fight inflation. According to Adrian Orr, the Reserve Bank's Gov., the rate remains "well above the 1 to 3% target range."
The increase is the biggest rate hike since the OCR was introduced in 1999, and takes the benchmark to its highest level since 2008. The RBNZ predicts annual inflation will accelerate to 7.5% in the final quarter of 2022 and will not return to the midpoint of the target until late 2025.
The Spin
Narrative A
New Zealand's decision to speed up monetary tightening is a temporary, inflation-tackling measure and — based on the accuracy of the RBNZ's forecasts of the emergence and persistence of previous episodes of inflationary pressure — should serve as a warning to the world. The Reserve Bank has employed this orthodox tactic amid historic downturn — other economists should take note.
Narrative B
New Zealand has followed the conventional wisdom of raising interest rates to tackle inflation, but this very economic practice is currently being questioned in countries like the US, as some economists argue that the strategy puts excessive pressure on domestic consumers and businesses. While internationally driven prices are transitorily boosting inflation, hiking rates risk prolonging the problem by driving up prices.
