The Reserve Bank (RBNZ) has resumed its battle with surging inflation by raising the official cash rate (OCR) and has signalled more rises through the year.
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It raised the OCR by 25 basis points (a quarter of a percentage point) to 1 percent, as expected, because of strongly rising prices, a hot housing market, and a tight labour market.
The RBNZ's monetary policy committee said it was concerned that inflation, which it forecast would reach 6.6 percent this year, would get entrenched.
"Further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation."
The RBNZ raised the OCR from a record low last year, saying the economy no longer needed the emergency stimulus.
It said the underlying economy was underpinned by strong exports, healthy consumer and business finances, and government spending.
But it warned in the short term the economy could be knocked around by the current Omicron outbreak.
The committee said inflation was in part being stoked by high oil prices, transport costs, and supply chain disruptions but it would fall in time.
"It remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment," the committee said.
However, in attached economic and financial forecasts, the Reserve Bank signalled a timetable of OCR rises to around 2.5 percent this year and towards 4 percent over the following two years.
RBNZ Governor Adrian Orr said the decision between a smaller and bigger rate rise had been a "finely balanced decision", but a bigger cut in the future could not be ruled out.
"We need to observe both the economy and how market pricing is behaving through time to assess whether we're having the impact needed to maintain inflation and so we will not rule out larger increases in the future. It's going to be a function of what is necessary and other shocks at the time."
However, Orr said retail borrowing costs should not rise too much because retail banks had already priced in expected increases.
The RBNZ said house prices were expected to fall perhaps by as much as 10 percent in the coming year and Orr said for a small minority that had borrowed heavily and paid a high price for their houses it was possible they would face negative equity - with their debt levels above the value of the property.
Setting up for a big hit
Economists regarded the RBNZ statement as aggressive and hawkish, tempered only by the current uncertainty caused by the Omicron outbreak.
BNZ head of research Stephen Toplis said the RBNZ looked to be laying the ground for a half percentage point rise, probably in May.
"It clearly wasn't ready to pull the trigger now given the uncertainties that abound ... but with the full suite of data available, more clarity about Omicron's impacts .. May [is] a very live meeting for a 50 point hike.
"The fact the RBNZ also raised its 'terminal' cash rate from 2.6 percent to 3.35 percent is also a clear signal that rates might rise more rapidly," Toplis said, adding that the RBNZ could not afford to wait too long.
Infometrics senior economist Brad Olsen said the RBNZ had done too little at this meeting and had lost control of inflation.
"These pressures are causing real challenges to New Zealand households and businesses and demand stronger action than the bank has taken to date."
Financial markets sent the New Zealand dollar and some short term wholesale interest rates higher after the RBNZ statement, but there was no immediate reaction in retail lending or borrowing rates.
RBNZ to start selling bonds
Meanwhile, the RBNZ said it would start to reduce its $55 billion stockpile of government bonds amassed during the pandemic when it engaged in quantitative easing through buying the bonds to keep a lid on interest rates and keep cash flowing through the banking system and economy.
The RBNZ said it would let some bonds mature and sell $5b a year starting from July.
Orr said the disposal of the bonds would be done in conjunction with the Debt Management Office, and in a way that did not disrupt the secondary market.
He said it was not intended that the selling - being dubbed quantitative tightening - would be another way to raise interest rates.
"We're getting back business as usual, but the OCR is our preferred method of monetary policy."
The RBNZ's next look at rates is 13 April, when it will issue just a brief statement.
The RBNZ's full monetary policy statement can be read here.
