New Zealand Hikes Interest Rate, Signals More to Come

New Zealand's central bank announced a fifth straight interest rate hike this week and hinted at a much more aggressive monetary policy tightening as central bankers try to tame runaway inflation.

The Reserve Bank of New Zealand (RBNZ) lifted the official cash rate by 50 basis points to 2.0%. This is a level not seen since the end of 2016. The RBNZ predicts the interest rate will reach 4.0% over the next year and stay there well into 2024.

The central bank expects inflation to peak at 7% in the second quarter of 2022, way above its 1-3% target. RBNZ governor Adrian Orr commented that neutral monetary policy for his country was around 2% to 3%, meaning the central bank would have to work hard to bring inflation in line.

The country is facing tough economic challenges, including a tight labor market and inflation at highs not seen in three decades, with both factors threatening to dampen economic growth.

What does this mean for me? 

New Zealand is the latest developed economy to make aggressive moves to address high inflation. Many analysts have been worried about a global economic downturn as consumer demand buckles under high interest rates.

All around the world, heightened economic uncertainty and inflation are diminishing global and domestic consumer confidence. As a diversified investor, you can expect to see evidence of this economic angst in the sentiment and performance of your portfolio items.