New Zealand’s central bank raised its benchmark interest rate by a half-point to 4.75% on Wednesday as it continues to tackle inflation. The move, which can increase consumer borrowing costs, comes despite the economic damage caused by a devastating cyclone.
Impact of Cyclone Gabrielle
Cyclone Gabrielle hit New Zealand last week, causing billions of dollars to damage homes and infrastructure and claiming 11 lives. Reserve Bank Governor Adrian Orr stated that the committee believes the disaster will likely increase prices for some goods and negatively impact economic activity and exports. The government has yet to determine the scale and timing of its economic response to the cyclone.
Interest Rate Hike Despite Cyclone
Despite the economic pain caused by Cyclone Gabrielle, the central bank raised the interest rate to ensure that inflation returned to the target of around 2%. Governor Orr stated that core inflation remained too high, and employment was at its maximum sustainable level, with the unemployment rate at a low 3.4%. The 0.5% rate hike comes after a record 0.75% hike in November, and the official cash rate is now at the highest since early 2009.
Market Expectations and Currency
The rate increase was in line with market expectations, and the currency was little changed, with 1 New Zealand dollar trading at about US$0.62. The key interest rate in New Zealand is now similar to the U.S. rate of 4.5% to 4.75% but higher than in many other developed nations, including neighboring Australia, where the rate is 3.35%.