© Reuters. FILE PHOTO: Two people walk towards the entrance to the Reserve Bank of New Zealand in the New Zealand capital of Wellington March 22, 2016. REUTERS/Rebecca Howard
By Wayne Cole
SYDNEY (Reuters) – New Zealand’s central bank raised interest rates to a seven-year high on Wednesday and promised more pain to come as it struggles to quell searing inflation in an overstretched economy .
The policy committee of the Reserve Bank of New Zealand (RBNZ) raised its key rate by 50 basis points to 3.5%, the fifth outrageous measure and the eighth hike in 12 months.
Indeed, the committee even debated whether to raise 75 basis points given increased price pressures in the economy, but decided on a half-point move.
“The Committee agreed that it remained appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment,” RBNZ Governor Adrian Orr said in a statement.
“Underlying consumer price inflation is too high and labor resources are scarce.”
The hawkish comment contrasted with a dovish turn from the Reserve Bank of Australia which downgraded to a quarter-point hike at its policy meeting on Tuesday.
Investors reacted by pushing the dollar up 0.7% to $0.5770, while two-year swap rates rose 6 basis points to 4.51%. Rates had fallen 25 basis points on Tuesday in the biggest daily decline since 2001.
Markets were pricing in a more than 60% chance that the RBNZ would hike another 50 basis points at its next meeting in November and that rates would peak at 4.5% in May.