Following the end of Cyclone, RBNZ declares additional interest rate increase due to economy’s recovery

On 23 May 2023 at 10:37pm (Sydney East), the Reserve Bank of New Zealand announced an official cash rate increase of 25 basis points at their Wednesday policy meeting. Despite financial markets predicting the increase from 5.25% to 5.50%, interest rates remain high due to inflation, and settings will need to remain restrictive for a while.

The RBNZ noted that financial conditions are constraining spending and reducing inflationary pressures, necessitating the need for further monetary policy tightening. While high interest rates are affecting the economy, recovery efforts from the devastating Cyclone Gabriel and a surge in immigration and tourism are likely to support the economy.

Despite the fiscal stimulus, the economy risks slipping into a shallow recession later this year. Despite this, the RBNZ is willing to tolerate a recession if it keeps inflation under control. As one of the first major central banks to respond to rising global inflationary pressures, the RBNZ has been consistently aggressive on policy brakes since late 2021 and currently has one of the highest interest rates in the world.

Economic slowdown signs are beginning to grow, with data pointing to sluggish corporate profits, declining retail sales, and falling government tax revenues. Economists attribute the Q1 retail sales decline of 1.4% to lower sales in the regions most affected by the cyclone.

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