Does New Zealand's Inflation Surge Hint At Bigger Rate Hikes In Future?

Saturday, 23 July 2022, 7:07 am
Press Release: Kalkine

Summary

• The inflation rate in New Zealand reached an eye-watering level of 7.3% in the second quarter. 
• Inflation has turned economic progress upside down.
• Experts predict interest rate hike as high as 75 basis points, leading to an OCR endpoint of 4% or higher this year.

The pandemic has been nothing short of an economic and social shock for most nations, including New Zealand. A lot has changed over the past two years, with authorities improvising at each step to keep the economy stable. This improvisation has become necessary in the present context where a range of unusual factors has weighed down on economic growth. 

One of the biggest issues facing economies in the post-pandemic world is inflation. Central banks across the globe have been scrambling for a solution to combat rising prices. However, inflation shows no signs of slowing down as international factors have largely been the causal factor behind it. 

The Russia-Ukraine war, supply chain disruptions and rising interest rates have concocted a perfect storm for most economies. New Zealand is no different as it has seen immense pressure from these international factors, leading to a contraction in the economy. 

The setback to the New Zealand economy has left economists worried. The present economy is in a very unusual position as some positive factors are keeping it afloat. A strong labour market and a rebound in tourism have positively influenced the economy. However, the question remains whether these redeeming factors could pull the economy out of a potential downturn in the future. 

GOOD READ: New Zealand inflation hits 32-year high at 7.3%

Higher than expected rise in inflation

Inflation figures for the second quarter present a worrying outlook for the economy. Statistics New Zealand revealed that the consumer price index (CPI) rose 7.3% in the second quarter, the fastest rise in prices since the June quarter of 1990. While the quarterly rise in CPI was lower than the previous quarter, the annual pace of inflation has become the focal point of all discussions. (SOURCE: https://www.mckinsey.com/featured-insights/inflation/how-inflation-is-flipping-the-economic-script)

The present scenario showcases a completely different tale than the one imagined by economists in late 2021. The reality has greatly diverged from previous expectations, leading many to believe that they would be forced to accept high inflation in the post-pandemic world. 

Several factors point to inflation being a long-term component of the economy, with no permanent solution in sight. Thus, inflation itself has been an economic shock that countries are struggling to come out of. 

Under this pressure, the RBNZ has taken the most opted route of hiking the interest rates. The RBNZ delivered three back-to-back 50-basis point hikes, taking the official cash rate to 2.5% in July. The central bank has also dropped hints that future rate hikes can be expected, given the rapid pace of inflation. 

Next rate hike to be even bigger?

The RBNZ has been clear in its approach, stating that the aggressiveness of interest rate tightening would be affected by the pace of inflation. This has led many experts to believe that the RBNZ may raise interest rates faster and higher in the subsequent months.

Additionally, inflation figures across other geographies are expected to be no match for New Zealand’s eye-watering inflation levels. The CPI data for the Australian economy, which will be released on July 27, is expected to be lower than the 7.3% level seen in New Zealand. This further indicates the severity of the situation and signifies the importance of RBNZ’s next decision. 

Some experts believe that CPI in New Zealand has peaked. However, the upcoming interest rate hikes would reflect this peak and could even be as high as 75 basis points. Similar oversized hikes are expected to occur in Australia as well, despite the economy being in a relatively lower inflation band.

On the other hand, some economists also believe that the RBNZ may not opt for a supersized cash rate hike of 75 basis points. Instead, another hike of 50 basis points would be more palatable for the economy, landing it in a better position than a hike of 75 basis points. Overall, the endpoint for the OCR this year could be 4% or even higher, as opposed to the previously expected 3.5%.

At the same time, the New Zealand unemployment rate has been a source of positive reinforcement. However, inflation has been a constant threat, even as fall in housing prices have eased some of the price pressures. With inflation expected to ease a bit by the end of this year, the central bank may enforce rate cuts in 2023.  

ALSO READ: Kiwi business confidence shaky, will RBNZ change its track?

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