Central Bank of New Zealand goes hiking in a difficult economic situation: polls

Bangalore — New Zealand’s central bank will continue to tighten as it raises interest rates twice in a row on Wednesday to curb inflation and cool the overheated housing market next year.

Massive fiscal and monetary stimulus measures injected to relieve the pain of the pandemic helped the economy recover strongly, boosting inflation to the highest and unemployment to the lowest for more than a decade.

As a result, financial markets began to price a series of rising interest rates until next year, and economists were in good agreement with that forecast.

All but two of the 23 economists in a Reuters survey November 15-19, the Reserve Bank of New Zealand (RBNZ) raised its official cash rate by 25 basis points at a policy meeting on November 24 to 0.75%. I expected it to be. The market has also risen 25 basis points and is fully priced.

The two opponents expected an increase of 50 basis points.

“Unlike other central banks, the RBNZ has no time to spare. They are certainly on the hiking cycle,” said Jarod Kerr, chief economist at Kiwibank.

“The economic situation is much hotter than the RBNZ expected … the decision to raise interest rates is partly due to the excess seen in the housing market.”

Ben Woody, an economist at Capital Economics, predicts a 50 basis point increase from the RBNZ on Wednesday. If this happens, it will return to its pre-pandemic level of 1.00%.

“It’s clear that more monetary tightening is needed, given the fact that all indicators of underlying inflation that banks monitor are currently near or above the bank’s target limits,” Udy said. Says.

The median predicts that the official cash rate (OCR) will reach 1.75% by the end of next year and 2.0% by the end of 2023. Still, it’s below 2014 levels since the RBNZ last raised rates for the fourth straight quarter.

New Zealand’s annual inflation rate rose to 4.9% in the third quarter. This is the fastest pace in more than a decade due to housing-related costs and other supply constraints.

The RBNZ also warned that more sustained inflationary pressures and rising inflation expectations, coupled with slowing growth, could lead to a sudden tightening of fiscal conditions.

Meanwhile, the unemployment rate fell to 3.4% in the third quarter, hitting a record low in December 2007. This was about the same time that the US economy fell into a serious recession after the burst of the housing bubble.

New Zealand’s sizzling housing market is also prominent in central bank monetary policy decisions. The central bank recently said house prices were above sustainable levels, increasing the likelihood of a correction.

Home prices have nearly doubled in the last seven years, at the most affordable prices in OECD countries due to chronic housing shortages, historic low interest rates, and cheap access to capital through government pandemic-led stimulating spending. is not.

“The labor market is stronger than ever and inflationary pressures are higher, while the housing market cycle seems to be very mature, and the minor COVID-19 problems are spreading nationwide,” Sharon said. .. Zollner, Chief Economist at ANZ.

“After all, the case of monetary tightening is clear.”

By Vivek Mishra