Interest rates are set to rise higher and sooner than previously forecast as the Reserve Bank goes on the offensive against inflation.
The Reserve Bank today increased the Official Cash Rate (OCR) by 50 basis points to 2 per cent and delivered a hawkish Monetary Policy Statement pointing to much higher rates ahead as it chases down inflation.
The Monetary Policy Committee said it sees the cash rate rising to at least 3.25 per cent this year and it was "resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 per cent target range."
"A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment," the Committee said.
In new forecasts, it indicated the cash rate may now peak at 3.9 per cent in June 2023 - as opposed to its previous forecast at 3.4 by mid-2024.
The 50 basis point hike was widely anticipated but the forecasts and tone of the statement suggest an increasingly aggressive approach.
"We thought the RBNZ would come out swinging, but today's statement was still more hawkish than expected," said ASB senior economist Mike Jones.
"This pace and degree of tightening will have consequences for house prices, spending and GDP growth such that we don't think the OCR will need to be lifted all the way to the 3.95 per cent peak the RBNZ's updated projections imply."
Markets reacted strongly to the tougher outlook.
The New Zealand dollar rallied sharply to US65c after the 2pm release from US64.33c beforehand.
"The pace of global economic growth is slowing ... European geopolitical uncertainty is also weighing heavily on business confidence and investment intentions worldwide," the Committee said.
"Likewise, Covid-19 restrictions in significant regions of China are exacerbating supply chain disruptions and adding cost and complexity to trade."
It reiterated its confidence in the local economy to weather the downturn.
"In New Zealand, underlying strength remains in the economy, supported by a strong labour market, sound household balance sheets, continued fiscal support, and a strong terms of trade."
"The reduction in Covid-19 health-related restrictions is also enabling increased economic activity, including hospitality and tourism."
"However, headwinds are strong. Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing."