MNI BRIEF: RBNZ Surprises With 50bp Hike to 5.25%

The Reserve Bank of New Zealand hiked the official cash rate by 50bp to 5.25%, beating market expectations of a quarter point rise. The Reserve noted inflation was still persistently high and employment beyond its maximum sustainable level to return inflation to its 1-3% target.

The hike is despite lower than anticipated economic activity over Q4 and emerging signs of capacity pressure easing, the RBNZ said. Demand continues to outpace supply capacity, maintaining pressure on inflation, the Reserve added.

The NZD overnight index swap rate rallied following the decision, with markets pricing in a 5.5% peak at the May 24 meeting, up from 5.3%. The market had expected a 25bp rise (See: MNI RBNZ WATCH: 25bp Lift Expected, Peak Priced Lower). NZD also firmed (See: Firmer, RBNZ Raises OCR 50bps).

In its decision, the RBNZ discussed recent developments in international financial markets and their implications for New Zealand. "Recent banking stress in the U.S. and Europe has resulted in lower wholesale interest rates and an increase in credit spreads," the RBNZ said in a statement.

The RBNZ's committee agreed a further hike is needed to ensure core inflation and expectations begin to fall and discussed a 25-50bp increase.