New Zealand’s central bank has raised interest rates for the first time in seven years to ward off rising inflation as Jacinda Ardern abandons her disastrous “zero Covid” strategy.
The Reserve Bank of New Zealand raised interest rates from 0.25pc to 0.5pc and warned of further action to come as the economy reopens and inflation soars above 4pc – double its official target.
The RBNZ is the latest major central bank to tighten policy following similar moves in Norway, South Korea and Canada as countries attempt to pull away from the pandemic.
The United States is set to slow its $120bn a month money-printing policy by the end of the year, while the Bank of England has also given increasingly hawkish signals on interest rates.
The central bank’s move comes despite its largest city, Auckland, still being in lockdown after a nationwide shutdown in August as the country – which closed its borders early in the pandemic – grapples with the outbreak of the delta variant.
New Zealand has suffered just 4,409 Covid-19 infections and 27 deaths since the crisis began, according to John Hopkins University data. But the country is well behind on vaccinations, with less than half its population double jabbed.
Ms Ardern said this week that New Zealand would follow Australia and other Asian countries with policies focused toward living with the virus, adding that Covid “was a tentacle that has been incredibly hard to shake”. A further 24 cases were reported in Auckland this week despite the lockdown.
The Reserve Bank is likely to follow up its move with another increase in November to combat rising prices despite the lingering shadow of the delta variant and shutdowns that the bank said had “badly affected some businesses in Auckland and a range of service industries more broadly”.
Inflation is already above its target range of 1pc to 3pc. Sharon Zollner, chief economist at ANZ Bank, said: “Risks around growth are to the downside, but inflation risks are to the upside. That’s awkward.”
New Zealand also faces its own inflation challenges, including a runaway housing market that has pushed up property prices almost 26pc to a record NZ$850,000 in the year to August.
The property bubble, which prompted intervention from Ms Ardern’s government earlier this year, has been fuelled by a scramble for homes, ultra-cheap mortgages and a bureaucratic planning system which has limited supply.
Per Hammarlund of SEB said: “Higher interest rates may help to mitigate risks in the housing markets where prices have risen to, according to the central bank, unsustainable levels.”
