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The main entrance to the Reserve Bank of New Zealand, in central Wellington, on July 3, 2017.David Gray/Reuters

New Zealand’s central bank raised interest rates by a hefty 50 basis points on Wednesday, the biggest hike in over two decades, extending a global shift toward tighter policy as authorities seek to reduce second-round effects from runaway inflation.

The Reserve Bank of New Zealand (RBNZ) raised the official cash rate to 1.50 per cent, a level not seen since June 2019, saying the larger move was intended to take the cash rate to a more neutral stance and prevent high inflation becoming entrenched.

All 21 economists in a Reuters poll had expected the RBNZ to hike the official cash rate, but only six had forecast a 50 basis-point move.

The rest had expected a 25 basis-point increase, while financial markets were fully priced for the larger hike – the biggest tightening since May 2000.

“A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment,” the RBNZ said in a statement accompanying its decision.

The central bank, however, tempered its hawkish stance by keeping its previous projections for the cash rate to peak around 3.35 per cent at the end of 2023. That held back the kiwi dollar from rallying sharply – it added 0.5 per cent to $0.6885 but remained well short of its recent five-month high of $0.7034.

Two-year swap rates actually eased 17 basis points to 3.46 per cent as the market trimmed back some of its future tightening expectations.

“The key point is that they have signalled that the OCR track remains about the same. This is only moderately hawkish, the currency can go up a little bit,” said Imre Speizer, head of NZ markets strategy at Westpac.

The RBNZ has been one of the most aggressive central banks in rolling back stimulus as policy-makers sought to get on top of a red-hot housing market and soaring inflation. The Ukraine war has further stoked price pressures, and the South Pacific island nation is only now facing the worst of the COVID pandemic, as Omicron cases sweep through the population amid a relaxation of rules.

New Zealand’s central bank is facing opposing challenges. House prices are falling and business and consumer confidence is taking a hammering, while risks to growth have risen from the Ukraine war even though fourth quarter GDP increased a robust 3.0 per cent. At the same time inflation is high and the employment rate is low.

Global bond yields have surged over recent weeks, pushed higher by runaway inflation and an aggressive Federal Reserve, which is expected to deliver two back-to-back half-point interest rate hikes in May and June on top of its 25-bps move in March, a Reuters poll showed.

The minutes of the RBNZ meeting said the board members agreed that their policy “path of least regret” is to increase the OCR by more now to head off rising inflation expectations and minimize any unnecessary volatility in output, interest rates, and the exchange rate in the future.

The members were also of the view the cash rate was still stimulatory at its current level.

The RBNZ expects annual inflation to peak around 7 per cent in the first half of this year, well above its 1-3 per cent target, underlining the urgency to temper price-setting behaviour.

Jarrod Kerr, chief economist at Kiwibank, expects another 50 basis-point hike in May, noting the RBNZ’s preference to go higher sooner.

“The Reserve Bank has shown that they’re pretty keen to get the cash rate higher earlier so we’ll have a cash rate of 3 per cent by the end of the year, which is quite punchy when you think about where other central banks are.”

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