SYDNEY — The Reserve Bank of New Zealand raised its official cash rate by a further 25 basis points at a policy meeting on Wednesday, warning that inflation remains too high and that interest rates settings will need to remain restrictive for some time yet.
The OCR was raised to 5.50% from 5.25% as expected by the financial markets.
“The Committee agreed that monetary conditions are restricting spending and reducing inflationary pressure. However, current inflation remains high and spending will have to continue to slow to better match the supply capacity of the economy, so that consumer price inflation returns to its target range,” the RBNZ said in a statement.
Still, the RBNZ noted that high interest rates were impacting the economy.
“Members discussed the evidence that demand is slowing in those parts of the economy that are most sensitive to higher interest rates. The constraining impact of higher interest rates has been most visible in spending and economic activity related to housing,” it said.
The decision to further tighten monetary policy settings comes as the country rebuilds after a devastating cyclone battered the north of the country in February, killing 11 people.
A cyclone recovery plan was the centerpiece of the government’s annual budget last week, with economists warning that the added spending could stimulate the economy and add to inflation.
The budget included 1.1 billion New Zealand dollars (US$687 million) to fund the recovery from Cyclone Gabrielle, with the total cost of the disaster estimated to be as high as NZ$14.5 billion.
New Zealand is also experiencing a surge in migration and tourism after borders were reopened, which is likely to support the economy this year.
Despite the budget stimulus, the agriculture-rich economy remains at risk of slumping into a shallow recession later this year, something the RBNZ has said it is willing to tolerate if it means getting inflation under control.
The RBNZ was one of the first major central banks to begin raising interest rates in response to a surge in global inflation pressures, and has consistently been among the most aggressive in tapping the policy brakes since late 2021, giving it one of the highest policy rates in the world.
Signs of a slowdown in the economy are starting to increase amid data showing weaker company profits, falling retail sales and fall government tax revenue.
Data earlier Wednesday showed retail sales in the first quarter fell 1.4% from the fourth quarter. Economists said the slump may have been due to a drop in sales in areas most affected by the cyclone.
This story originally appeared on Marketwatch
