Image source, Reuters

New Zealand's central bank has raised interest rates for the first time in seven years as it tries to contain rising inflation.

The Reserve Bank of New Zealand (RBNZ) increased its cash rate by a quarter of a percentage point to 0.5%.

Economists had expected the hike last month but the bank held off due to an outbreak of the Covid-19 Delta variant.

New Zealand is one of the first developed economies to reverse rate cuts put in place during the pandemic.

The RBNZ also said it plans to remove more stimulus measures as the economy continues to recover.

"The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment," the RBNZ said.

New Zealand has recovered rapidly from a recession last year, partly because it managed to contain the coronavirus and was able to begin to reopen its economy before other countries.

The RBNZ last raised the cost of borrowing at its July 2014 interest rate setting meeting.

It had cut its main interest to a record low of 0.25% in March last year to help support the economy against the impact of the coronavirus pandemic.

Unwinding emergency measures

Central banks, governments and international financial bodies had slashed interest rates and pumped trillions of dollars into the global economy last year to help protect it from the effects of countries going into lockdowns and closing their borders.

The hike puts New Zealand amongst a handful of developed economies that have raised borrowing costs in recent weeks as central banks look to wind back those emergency measures.

In August, South Korea became the first major Asian economy to raise interest rates since the coronavirus pandemic began.

The Bank of Korea increased its base rate of interest from a record low of 0.5% to 0.75%.

The move was aimed at helping curb the country's household debt and home prices, which soared in recent months.

Norway and the Czech Republic have also raised their borrowing costs in the last month.

Other countries are also expected to hike interest rates in the coming months. These higher borrowing costs will inevitably be passed on to individuals and businesses.

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