New Zealand Interest Rate Rise Increases Inflation Pressure on Central Banks | New Zealand


New Zealand’s central bank raised interest rates for the second time in as many months to 0.75%, with many forecasters expecting borrowing costs to hit at least 2% by now next year and maybe more.

In a warning signal for central banks around the world as they struggle to contain inflationary pressures, the Reserve Bank of New Zealand (RBNZ) raised the official rate by 25 basis points to 0.75% as scheduled at its last policy meeting of the year on Wednesday.

The RBNZ forecast signaled a more aggressive tightening cycle, reaching 2.5% by 2023 and increasing by December 2024.

Its governor, Adrian Orr, has warned that owners of New Zealand’s scorching housing market need to prepare for tougher times ahead.

“Homeowners who are new to the market with extremely high debt levels have to be incredibly careful and understand that they have to deal with the higher interest rates,” Orr said.

Independent economists have agreed that borrowing costs will rise quite rapidly over the next few months.

“Given the heat of the economy, we believe the RBNZ is far from over,” said Ben Udy, economist at Capital Economics. “We expect the bank to continue raising rates next year to around 2.0% by the middle of next year.”

Michael Gordon, acting chief economist at Westpac Bank in Australia, said he believed the RBNZ could hike rates by 0.5% at its meeting in February and that rates could exceed 2.5%.

“We continue to expect a series of hikes over the coming policy meetings, and we expect the cash rate to peak at 3% in the third quarter of 2023.”

The RBNZ move, which began its so-called tightening cycle by raising rates 0.25% in October, came hours after former Bank of England governor Mervyn King said that central bankers had been caught off guard by the rise in prices which exposed their “King Canute” theory of inflation.

Lord King used a speech in London to accuse banks around the world of relying too much on models showing that inflation is returning to low levels even without adjusting interest rates up. Inflation theories were to explain the changes to the financial system brought about by the banks’ money printing programs, which King said had become “unsustainable.”

Pressure on the U.S. Federal Reserve to hike rates increased earlier this month when October’s inflation figure hit a 30-year high of 6.2 percent, due to rising costs of l energy and shortages throughout the economy as a result of the post-pandemic dislocation of supply chains.

Although the Fed believes inflation is “transient” and has guided the markets that it does not expect a rate hike until the end of next year, more and more are expected to be. that it acknowledge the concerns of investors by withdrawing the massive post-pandemic monetary stimulus more quickly. than expected at its meeting on December 14 and 15.

Inflation is a global problem and Britain is not far behind the United States with an inflation rate of 4.2% in October. The Bank of England almost hiked rates earlier in November. This near miss has left most forecasters certain that the Monetary Policy Committee will act when it meets on December 16. The Governing Board of the European Central Bank meets on the same day.

Like major economies, New Zealand has used huge amounts of fiscal and monetary stimulus to ease the pain of the pandemic and help the economy recover sharply. This in turn pushed inflation to its highest and the unemployment rate to its lowest in over a decade. Annual inflation hit 4.9% in the third quarter, the fastest pace in more than a decade, while the unemployment rate fell to 3.4%, matching its lowest level since December 2007.

Meanwhile, house prices have doubled over the past seven years and are the least affordable among OECD countries.

These pressures prompted the RBNZ to hike rates in October and signal further tightening. The country is set to end lockdowns and transition to a living system with the virus from December 3, allowing all businesses to resume operations.


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