Westpac Economic Overview, February 2022 – The Bill Comes Due

Westpac’s latest Economic Overview shows that New Zealand has continued to benefit from its strong economic and health response to Covid-19. But the price of that success is becoming apparent, with capacity constraints and higher inflation likely to be a key feature in 2022.

Policymakers need not be shy about their role in this, says Westpac’s Acting Chief Economist Michael Gordon. “The Government and the Reserve Bank’s stated intentions were to err on the side of doing too much rather than too little. And to their credit, they achieved that. Stubborn inflation is a better problem to have than stubborn unemployment.”

“But there was never going to be a cost-free solution to a shock of this nature, and the bill is now coming due,” says Mr Gordon. “Our view remains that the RBNZ will need to lift the Official Cash Rate beyond its estimates of ‘neutral’ and into tight monetary policy settings, at least for some time.”

In this respect, New Zealand differs from the rest of the world only by a matter of degree. Many other central banks are waking up to the fact that they also have an inflation problem, and are expected to join the RBNZ in raising interest rates this year.

There are signs that higher mortgage rates are now getting some traction on cooling the housing market. However, this does not mean that the RBNZ’s job is done, says Mr Gordon. “To maintain this success, the RBNZ will need to deliver on those future OCR hikes that the market has factored in.”

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