By Stephen Wright
WELLINGTON, New Zealand -- New Zealand's central bank raised interest rates from a record low and signaled more increases over the next year, as it seeks to tame inflation and rein in booming house prices.
By lifting its benchmark rate to 0.5% from 0.25%, the Reserve Bank of New Zealand joined central banks in South Korea and Norway in tightening monetary policy. Interest rates in more volatile emerging economies from Brazil to Turkey have also risen in response to inflationary pressures that have worsened as supply chains gum up and shipping rates soar.
New Zealand, with a population of around five million, is balancing short-term shocks to its economy from restrictions introduced in the country's largest city, Auckland, in mid-August to curb a Covid-19 outbreak with price pressures that could derail its recovery if left unchecked.
Expectations for inflation are now above the top end of the Reserve Bank of New Zealand's target range of 1.0% to 3.0%, as global shipping disruptions and this year's run-up in commodity prices have fed into prices of everyday goods. On Tuesday, the global benchmark price of Brent crude oil hit its highest level since October 2018, while copper set a record high earlier this year.
New Zealand's unemployment rate has declined, reaching 4.0% in the three months through June, driven in large part by the closure of its border to most of the world at the start of the pandemic. Employers from agriculture to construction and engineering contractors are struggling to find enough workers, with many raising wages to get the labor they need.
The Reserve Bank of New Zealand's primary objectives are to achieve 2% annual inflation over the medium term and full employment. However, the country's government earlier this year directed it to consider housing prices in monetary-policy decisions.
That has increasingly become an issue after New Zealand's response to the pandemic ignited a local housing boom.
In March last year, the Reserve Bank of New Zealand lowered its cash rate by three quarters of a percent to 0.25% as it sought to prop up activity. In doing so, it made new home loans more attractive to owner-occupiers and speculators. Median home prices in New Zealand have risen about 30% in the past year, among the fastest in the Organization for Economic Cooperation and Development.
New Zealand's central bank has sought to cool the property market with lending curbs, while the government has reduced tax advantages for landlords, but home prices have continued to rise. It is a problem faced by other countries where a record-setting rise in home values during the pandemic is triggering fresh debates about housing affordability. On Wednesday, Australia's financial regulator raised the minimum interest-rate buffer it expects lenders to use when assessing the ability of new borrowers to meet home-loan repayments.
The Reserve Bank of New Zealand's rhetoric typically plays down the role of housing in its monetary-policy decisions, though it may be expedient to include it currently as inflation, employment and house prices are all heading in the same direction, said Gareth Kiernan, chief forecaster at Infometrics, an economics consulting firm.
"It will be convenient for the bank to wrap any housing market arguments into the justification for their tightening as well, to help deflect any political criticism that might otherwise come their way for not doing enough to slow the housing market," he said.
The central bank in August projected the cash rate would reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, though some economists doubt it will exceed 1.5%. It isn't due to release new projections until late November.
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