SummaryThe Reserve Bank of New Zealand (RBNZ) has raised interest rates by 50 basis points to 2.5%, a level unseen since March
2016.A slowdown in consumer confidence has clouded economic growth for the coming periods.Labour market strength has provided some respite from ongoing international pressures.
The Reserve Bank of New Zealand (RBNZ) has been on an aggressive policy tightening road, leaving many sceptical of the
economy's growth trajectory over the coming months. Despite the central bank's solid confidence in its rate hike policy,
consumer and business confidence dips have worried economists. Rising interest rates could stall economic growth if the
current drop in sentiment persists.
In its July monetary policy meet, the RBNZ raised the official cash rates by 50 basis points to 2.5% for the first time
since March 2016. This was the sixth straight rate hike by the RBNZ. The Kiwi central bank has resorted to repeated rate
hikes to combat rising inflation. However, the decision has also dampened consumption in the economy, with hardly any
effect visible on inflation levels.
The present inflation pressures seem to have reached an irreversible level, as most economies are witnessing
inflation-related slowdowns. Most notably, inflation pressures in the US have triggered a worrying streak among
economists, with a recession being a real possibility for the economy. At the same time, these recessionary fears have
spread to other parts of the world, including New Zealand. However, some experts believe that New Zealand might weather
this storm due to the strength of its labour market.
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A streak of downward decline in consumer confidence became evident as soon as interest rate hike speculations surfaced.
People on the verge of buying big-ticket items such as houses, cars had to delay these purchases abruptly. Fearing rises
in monthly repayments, many individuals held off taking on additional liability under the present scenario.
Part of this declining sentiment is visible in the ANZ-Roy Morgan New Zealand Consumer Confidence data for June. The
reports by the bank suggest that consumer confidence dipped 1.8 points during the month to 80.5.
The report highlighted consumers are currently facing severe conditions. Particularly the rising prices of goods and
services have been seen majorly due to international factors. Incomes have not kept up with inflation, while interest
rates have been rising. Meanwhile, house and asset prices have been falling, making expensive properties worth much less
than their original price.
The report also showed how inflationary pressures have bogged down consumer confidence. Inflation expectations among
individuals increased from 5.1% last month to 5.6% in June. Despite the observed data, the RBNZ is expected to continue
its monetary tightening approach till target inflation levels are not reached.
Consumer Price Index (CPI), a measure of inflation, rose from 1.5% in the first quarter of 2021 to 6.9% in the first
quarter of 2022. Going by this worrying trend, the inflation rate is expected to reach as high as 7% in the second
quarter of this year. Thus, the RBNZ would leave no stone unturned in ensuring that inflation is brought down.
GOOD READ: Kiwi business confidence shaky, will RBNZ change its track?Labour market: The source of confidence
The RBNZ has given assurance that its rate hikes would likely not be highly jarring for the economy. A significant
reduction in inflation is often accompanied with a drop in economic growth. However, with the right factors in place,
New Zealand might be able to manage a temporary reduction in economic growth.
The underlying strength is expected to arise from the labour market, which has remained exceptionally robust even in the
present trying times. The RBNZ expects the economy to not seep into the territory of negative economic growth due to
this confidence shown by the labour market.
Additionally, demand has remained upbeat, despite rising prices. Most notably, the high demand for travel highlights
that a revival is underway for the battered hospitality sector. As long as individuals remain employed and on a stable
income source, they are likely to keep the demand high.
Despite confidence riding high, international pressures are building up and could interfere with New Zealand’s economic
recovery. Specifically, lockdowns in China and rising geopolitical tensions across the globe are serious threats to the
supply chain ecosystem.
For the economy to properly manage rising inflation and interest rates, wages and prices must be kept in constant check.
Stable consumer demand can help manage increasing inflationary pressures and other global challenges as well.