The only way is up for NZ cash rate

New Zealand’s official cash rate is poised to hit a six-year high when the Reserve Bank considers monetary policy this week.

But the big question is where it might end the year, and whether falling consumption might bring a Kiwi recession.

On Wednesday afternoon, governor Adrian Orr is likely to green-light another 50 basis point rise to counteract spiralling inflation, taking the official cash rate from 1.5 to 2.0 per cent.

Consumer price index inflation hit 6.9 per cent last month, well above the RBNZ’s target band of one to three per cent.

The only way is up for interest rates in New Zealand, and the consensus is for a second hike of 50 basis points, and further jumps at each meeting this year.

“Rapid inflation means higher interest rates. It’s that simple,” Kiwibank chief economist Jarrod Kerr said.

“From two per cent, we expect to see the RBNZ slow down a little … we expect to see the cash rate rise, in 25bp increments, to three per cent by November.”

ANZ New Zealand chief economist Sharon Zollner agreed “the path is murkier” beyond the May cash-rate review.

“There are good reasons to get another solid hike under the belt,” Ms Zollner said.

“CPI inflation at 6.9 per cent is obviously well beyond the pale.”

Westpac are predicting a major lift to 3.5 per cent by year’s end.

“The Reserve Bank has recognised the value of early action to reduce the risk that even higher interest rates are needed in the future,” Westpac NZ’s acting chief economist Michael Gordon said.

“We’re not talking recession, but we do expect some fairly lean growth in household spending in the year ahead, as other sectors such as international tourism take up the growth baton.”

Mr Kerr was happy to use the ‘R word’, saying “recession risk” might lead the RBNZ to stop this round of tightening at 3.0 per cent.

“Cooling the housing market and taming consumption is the desired impact of rate hikes and we’re forecasting house prices to fall by around 10 per cent by year end,” he said.

The rapid inflation is a major shock in New Zealand, where interest rates last hit 2.0 per cent in September 2016.

The official cash rate stood still at 1.75 per cent for the whole of 2017 and 2018, before a slide to 1.0 per cent in 2019 preceded the emergency COVID-19 setting of just 0.25 per cent.

The Reserve Bank’s generous bond-issuing during the pandemic is credited with preventing a hard landing during lockdowns and some of the inflation experienced today.

But as the government is at pains to tell hard-hit Kiwis, much of the inflation challenge is coming from offshore, with supply-chain disruptions from China and the Russia-Ukraine war.

Ben McKay
(Australian Associated Press)


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