New Zealand central bank raises key interest rate

WELLINGTON, New Zealand (AP) — New Zealand’s central bank raised interest rates for the first time in more than seven years on Wednesday, removing some of the support it put in place when the coronavirus pandemic began.

The Reserve Bank raised the benchmark rate to 0.5% from a record low 0.25%.

The move came despite an ongoing lockdown in Auckland, its largest city, due to a coronavirus outbreak.

The bank said the lockdown had badly affected some Auckland businesses but a broad range of indicators pointed to New Zealand’s economy performing strongly overall. It said inflation was expected to rise to 4% in the short term before easing to 2% in the medium term.

The last interest rates move by the bank was a cut of 0.75 percentage points in March 2020, when the pandemic was first taking hold.

Earlier this week, Prime Minister Jacinda Ardern announced a cautious plan to ease the lockdown restrictions, acknowledging what other countries did long ago: It can no longer completely get rid of the coronavirus.

Since early in the pandemic, New Zealand had pursued an unusual zero-tolerance approach to the virus through strict lockdowns and aggressive contact tracing.

The strategy kept outbreaks largely in check. While the country has kept its borders mostly closed, domestic business activity and trade have suffered less than in many other countries.

“The RBNZ’s decision to begin its hiking cycle while Auckland is still in lockdown highlights that the New Zealand economy is on the brink of overheating," Capital Economics said in a commentary. It said it expects further rate hikes in coming months.

Shares fell Wednesday in New Zealand after the hike was announced.

Central banks worldwide have been reassessing their policies as a faltering recovery takes hold after the pandemic downturns in 2020.

The decision comes as the U.S. Federal Reserve inches toward cutting back on its own massive support for the U.S. economy, with a rate hike expected perhaps by next year.

In Japan, the central bank has been reducing some asset purchases though it shows no sign of backing away from its efforts to keep interest rates near zero after years of failing to attain a target interest rate of 2%.