NZ hikes record interest rate_ flags 2023 recession

The Reserve Bank of New Zealand on Wednesday hiked interest rates by a record amount and warned the economy might have to spend an entire year in recession to combat the sky-high inflation.

New Zealand's central bank raised the official cash rate (OCR) by 75 basis points to 4.25% and crucially now sees rates peaking at 5.5%_ compared with a previous forecast of 4.1%.

The central bank's overtly hawkish tone caught some traders off-guard_ lifting the local dollar and sending swap rates higher_ while its predictions of a recession also surprised.

The central bank projects the economy will start contracting in the second quarter of 2023 and continue declining until the first-quarter of 2024.

"Inflation is no one's friend and in order to rid the country of inflation we need to reduce spending levels_" Governor Adrian Orr told a press conference. "That means that we will have a period of negative GDP growth."

Minutes from the meeting showed the RBNZ had even considered a full percentage point hike.

Markets were quick to price in a change in rate expectations.

Key two-year swap rates surge 27 basis points at 5.26%. The market is now pricing in a cash rate peak of 5.54%.

The kiwi dollar climbed 0.4% against the greenback to trade at $0.6164.