Have Interest Rate Hikes In New Zealand Brought Forth Any Changes?

Wednesday, 9 March 2022, 7:25 pm
Press Release: Kalkine

Summary

• Policy action has unfolded in the form of several closely timed interest rate hikes in New Zealand within a short span. 
• The immediate effect of an interest rate hike has been felt across the forex market in the New Zealand dollar. 
• Some experts suggest that domestic policy measures might not be effective against inflation stemming from international forces.

In the COVID-19 era, central banks across the globe have resorted to interest rate hikes to fight off inflationary pressures and move a step closer to normalcy. For New Zealand, policy action has unfolded in the form of several closely timed interest rate hikes within a short span. This has left many individuals worried about the economy and real estate prices.

Despite the uncertainty, financial confidence is improving amongst New Zealanders. As per the latest Financial Resilience Index (FRI) from the Financial Services Council, more individuals are feeling secure concerning their jobs. At a time when the country is slowly inching towards economic stability, rising interest rates seem to be posing serious affordability and consumer spending challenges. 

Overall, separating the effects of an interest rate hike from a whirlwind of increasing geopolitical tensions is tough. Meanwhile, some direct impacts of an interest rate rise can be already seen. These effects may translate into slower spending with time in case of further policy tightening. 

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NZD and mortgage rates

The hawkish policy stance taken by the Reserve Bank of New Zealand (RBNZ) has been driving many short-term changes across the economy. Last, the central bank raised the interest rates by 25 basis points, taking the current interest rate to 1%. While the move was essentially an expected one, it was RBNZ’s third interest rate hike since the pandemic started.

The immediate effect of an interest rate hike has been felt across the forex market in the New Zealand dollar. The indication of a tightening cycle initially sent the NZ dollar soaring as the currency found comfort in increasing resource prices. However, it recently fell from fresh 2022 highs after sky-high oil prices threatened global economic recovery. 

Along with the local currency, mortgage rates have also responded to interest rate changes. Following in the footsteps of the central bank, commercial banks like ASB and Westpac recently raised the home loan interest rates, though by a smaller amount. Both banks took a cue from ANZ’s move to hike mortgage rates to weaken inflation. 

Experts suggest that the rise in mortgage rates is crucial towards the stabilisation of housing prices as this might discourage even wealthy borrowers from taking a loan. The effects of these expectations are visible in easing housing prices seen in January, with declining sales leading the way.

Tackling inflation

While the central bank’s efforts are centred around controlling the inflation rate, little effect has been seen in consumer prices so far. Rising consumer prices have become a persisting issue amidst supply-chain constraints and a lack of an adequate workforce. 

Some experts suggest that domestic policy measures might not be effective against inflation primarily stemming from international forces. The supply bottlenecks developed across global economies require a well-integrated solution with a broader outreach. 

Meanwhile, other experts argue that interest rates directly impact investors’ risk appetite and investment. They believe that interest rate changes can influence consumer spending and inflation. However, recent evidence suggests that these linkages have resulted in slower equity market activity. Alternatively, the successful recovery of the economy has helped sustain an improvement in businesses’ profit margins. 

Despite wavering results, the central bank is expected to move ahead with tightening measures in the months ahead. Speculations are rife that the RBNZ will undertake more aggressive monetary policy tightening and reduce its NZ$50 billion bond holdings acquired under the Large Scale Asset Purchase programme in the months ahead. It remains to be seen if this will be the central bank’s longstanding answer to the sky-high inflation. 

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Despite ongoing headwinds, certain experts are projecting as many as ten consecutive rate hikes of 25 basis points from the RBNZ. However, the rise in interest rates might hamper economic activity, doing little to control the bigger problem of increasing inflation. Meanwhile, the outlook for the New Zealand economy remains uncertain amidst the ongoing Russia-Ukraine war, even with adequate policy regulation.

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