By Lucy Craymer
WELLINGTON, Nov 23 (Reuters) – New Zealand’s central bank raised interest rates by a record amount on Wednesday, warning the economy may have to spend a full year in recession to rein in sky-high inflation.
The Reserve Bank of New Zealand (RBNZ, for its acronym in English) raised the official interest rate by 75 basis points, to 4.25%, and considers that rates will reach a maximum of 5.5%, compared to to the previous forecast of 4.1%.
The central bank’s openly aggressive tone surprised some traders, driving up the local dollar and interest rates in the markets, while its recession predictions also surprised.
The RBNZ projects that the economy will begin to contract in the second quarter of 2023 and continue to decline until the first quarter of 2024.
“Inflation is nobody’s friend and to rid the country of inflation we have to reduce spending levels,” RBNZ Governor Adrian Orr told a news conference. “That means we will have a period of negative GDP growth.”
The minutes of the meeting showed that the RBNZ had considered even a one percentage point rise.
Markets were quick to forecast a change in rate expectations.
Two-year rate swaps rose 27 basis points to 5.26%. The market is now projecting an interest rate high of 5.54%.
The Kiwi dollar (New Zealand currency) was up 0.4% to trade at $0.6164.
(Reporting by Lucy Craymer; editing in Spanish by Tomás Cobos)