As expected, the Reserve Bank of NZ yesterday lifted its key cash rate 0.25% to 0.75% which will be followed today by an equally anticipated decision by South Korea’s central bank to lift its key rate to 1%.
The RBNZ’s move was the second and today’s decision by the Bank of Korea will also be its second. And despite rate rises from NZ and possibly South Korea because of fears of rising inflation, the decisions will be noted by the Reserve Bank here but will not change its ‘patient’ approach.
But what was not expected was the aggressive tone yesterday from RBNZ officials about future rate moves – a rate of 2.6% was forecast by the end of 2023 because of the strength of inflation, the tightness of the labour market, the continuing housing price boom and especially consumer price inflation now forecast to top 5%.
Although a high forecast, it was also some sleight of hand from the RBNZ yesterday, because the CPI hit an annual rate of 4.9% in the September quarter. Which, in effect, means the central bank is suggesting it could be looking at a slowing in the rate of increase in costs.
That saw the Kiwi dollar dip in trading yesterday afternoon.
The new forecast updates the August one which predicted a top for the Official Cash Rate of 2.1% by March, 2024.
The NZ arms of Australia’s major banks started lifting key lending rates in the wake of the announcement with the Commonwealth’s offshoot, ASB first to go higher.
While opting a standard 0.25% rate rise, the Reserve Bank said further removal of monetary policy stimulus was expected over time “given the medium-term outlook for inflation and employment”, tipping that inflation would temporarily rise above 5% before falling back.
The bank’s monetary policy committee said it discussed how fast interest rates need to be increased, and said there was “uncertainty about the resilience of consumer spending and business investment as the country adapts to living with the Covid virus in the community”.
And it is clear that data from Europe and the US continues to confirm the unpredictability of the pandemic and the speed that economies such as the Australia, France, Germany, the UK and the Baltic nations have been whacked hard in the last month by a resurgence of the Delta variant.
So quick has been the rate of growth for infections, and the spreading clamps on activity in the wider economy, that some economists wonder if the global economy’s momentum will be slowed in the first half of 2022.
The RBNZ recognised that in its post monetary policy decision meeting statement:
“The level of global economic activity continues to rise, supported by accommodative monetary and fiscal policy settings, and the relaxation of COVID-19 health-restrictions. The pace of global economic growth has ebbed however, due to the elevated uncertainty created by the persistent COVID-19 virus.”
“New Zealand’s public health restrictions are easing as the country transitions into the COVID-19 Protection Framework. The framework will enable greater mobility of people, and goods and services.
“With the easing of restrictions, it is anticipated that the COVID-19 virus will become more widespread geographically, albeit manageable for health authorities and less harmful for those vaccinated. However, household spending and business investment will be dampened in the near-term by these ongoing health uncertainties.
“The recent nationwide health-related lockdown, the more prolonged restrictions in Auckland, Northland and the Waikato, and the continued ‘Level 2’ restrictions elsewhere, resulted in a sharp contraction in economic activity. Despite these lockdowns, underlying economic strength remains supported by aggregate household and business balance sheet strength, fiscal policy support, and strong export returns.
“Capacity pressures have continued to tighten. For example, employment is now above its maximum sustainable level. A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.
“Headline CPI inflation is expected to measure above 5 percent in the near term before returning towards the 2 percent midpoint over the next two years. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk generating more generalised price rises given the current domestic capacity constraint,” the RBNZ statement said.