As inflation exceeds expectations, New Zealand is expected to raise interest rates

The Reserve Bank of New Zealand is expected to raise interest rates on Wednesday to cool the hot economy and runaway real estate market. This decision will be closely watched by central banks around the world.

Economists said that the monetary policy decision will be to raise the official cash rate by 25 basis points and provide more active guidance for further interest rate hikes, or to raise interest rates by 50 basis points.

The Bank of New Zealand’s move is International interest Because it is one of the first central banks to tighten policy after the coronavirus pandemic – Raise interest rates In the context of soaring global inflation, it fell to 0.5% last month.

The Bank of New Zealand is unusual among its peers Employment Operating at or above the target level puts pressure on the central bank to reduce monetary stimulus.

Westpac New Zealand Chief Economist Michael Gordon said: “Recent data has strengthened the need for the New Zealand economy is heating up and inflationary pressures are increasing,” he expects to rise by 25 basis points, but added that there is a significant risk of 50 basis points. . Basis points increase.

Until recently, New Zealand kept Covid-19 cases close to zero, and its labor market has not been severely damaged by the pandemic. Data in the third quarter showed that even if the labor force participation rate rose to a high of 71.2%, the unemployment rate still fell to a historical low of 3.4%.

Data including wage growth is far better than the Bank of New Zealand’s forecast.

At the same time, the annualized inflation rate in the third quarter rose to 4.9%, much higher than the 4.1% forecast by the Bank of New Zealand. House prices rose further in October, up about 30% year-on-year.

Nomura Australia’s senior economist Andrew Ticehurst cited rising long-term inflation expectations and other strong data as reasons for the 50 basis point hike by the Bank of New Zealand.

“The data shows that there is a significant risk of overheating,” Tieshurst said. He added that another reason for the greater increase is that the next meeting will only be held in February.

“Since there is a three-month interval between meetings, we think it would be beneficial to apply the brakes harder, which will result in the cash rate ending at a symmetrical 1%,” Tieshurst said.

The central bank of New Zealand’s monetary policy is very stimulating, because its bank financing plan launched at the end of last year to deal with the impact of Covid-19 will continue until December 2022. Its asset purchase plan ended in July, but it still holds all bonds.

Jarrod Kerr, chief economist at Kiwibank, said that it is possible to raise interest rates by 50 basis points, but he expects the Bank of New Zealand to achieve the same result through the forward guidance of its “OCR track”, which provides forecasts of interest rate changes.

“We expect the Bank of New Zealand to adjust its OCR trajectory by predicting the upward adjustment and pushing up the end point in advance,” Kerr said.

The interest rate decision will be accompanied by a quarterly monetary policy statement, showing the latest forecast for the economy. In its last statement in August, the Bank of New Zealand predicted that by September 2023, the cash interest rate would rise to 2% and remain near that level until September 2024.

Kerr expects the Reserve Bank of New Zealand to reach a peak of about 2.7%, while Westpac’s expectation is 3%.

Gordon said that the risk of falling behind the curve may prompt the Bank of New Zealand to take more action now. He said that the benefit of taking bigger steps on Wednesday is that the Bank of New Zealand can avoid higher peaks in cash interest rates.

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