How Are Inflation Expectations Shaping Up In New Zealand?

Wednesday, 20 April 2022, 6:10 pm
Press Release: Kalkine

Summary

• A range of global market forces has lifted inflation expectations in New Zealand.
• The RBNZ has embraced aggressive monetary policy tightening by raising the cash rate by 50 basis points.
• The central bank intends to maintain low and stable inflation within its target range.

Since the onset of the pandemic, the global economy has been facing a range of challenges that need to be addressed individually. The Russia-Ukraine war has further opened a new can of worms for economies worldwide, such as excessive inflation. As rising inflation grips economies by the throat, policymakers are leaving no stone unturned to combat it. New Zealand is one such country actively battling inflation via its monetary policies.

Policymakers in New Zealand have had some of the most aggressive and swift reactions to the rise in inflation. The Reserve Bank of New Zealand (RBNZ) has embraced monetary policy tightening to curb the ongoing rise in inflation. The central bank recently introduced its fourth interest rate hike in a row to reduce the devastating effects of surging inflation.

However, since inflationary expectations have stemmed mainly from global factors, little can be done on the domestic front to completely eradicate them. Meanwhile, New Zealand seems to be facing higher pressure to reduce the potential rise in inflation, being one of the first nations to have lifted interest rates after the pandemic.

Where do NZ interest rates stand?

Interest rates have been the Reserve Bank’s go-to measure to bring surging consumer prices under control. While rising interest rates help curb inflation, they make it harder for consumers to carry out large purchases and are often associated with a slowdown in economic activity. However, the slowdown must be enough to keep crucial activities intact so that the economy does not fall into a recession.

The RBNZ has taken a rather aggressive approach to interest rate tightening. Specifically, the latest rate hike of 50 basis points could be unfavourable for the economy and potentially hurt loan holders immensely. In its recent monetary policy meeting, the RBNZ raised the official cash rate (OCR) to 1.50%, in line with current inflation expectations.

The RBNZ expects annual inflation to peak around 7% in the first half of this year. This would be well above its 1-3% target range, enough to sound the alarm bell for policymakers to take an instant approach to temper further inflationary expectations. However, the biggest concern facing the RBNZ is that a rate hike could interfere with the economy’s growth, making it difficult for the country to emerge from the recent setbacks.

MUST READ: In a hawkish move, RBNZ raises OCR by 50 basis points

Are more rate rises coming ahead?

Inflation in New Zealand has shown no signs of a slowdown in the recent past, with the house price inflation taking centre stage. Earlier this year, Statistics New Zealand reported that inflation increased 5.9% from the December 2020 quarter to the December 2021 quarter. This marked the biggest jump in inflation since 1990 in the country.

The RBNZ is most likely to resort to monetary policy tightening in the coming quarters to tame high inflation. The latest massive interest rate hike by the central bank was also sooner than the market expectations. However, the RBNZ is very well aware that if interest rates are increased too fast, it could prompt an economic slowdown.

However, this is not the end of the story for New Zealand. Experts suggest that inflation has not yet reached its peak and could build over its ongoing surge in the coming months. All eyes are glued on consumer prices data due on Thursday for the March 2022 quarter, which will further reveal the state of inflation in the economy.

Given the pace of inflation in major economies, analysts in New Zealand see no end in sight to high inflation. As inflation expectations surge, the adversities for households might worsen in the days ahead, with essential items such as food and petrol becoming unaffordable.

It is worth noting that the challenge of curbing inflation is not something that the RBNZ has not previously tackled. Yet the background setting under which this needs to be done is unique. A range of market forces can create havoc if the rate increases are too sudden and intense. Despite these risks, the RBNZ is focused on constraining inflation expectations in the medium term.

In a nutshell, the costs associated with letting inflation run amok are very high. If inflation settles in for a longer duration, it can hurt consumer demand, employment, profits, and the overall economy. Thus, the RBNZ aims to maintain low and stable inflation and contribute to maximum sustainable employment.

GOOD READ: Is Inflation likely to take a breather by the end of 2022?

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