PHOTO: Economist says Kiwis will need tighter budgets as retailers plan massive price increases. Credits: Newshub
Another rise in interest rates by the Reserve Bank (RBNZ) seems certain this week. The only issue is how large will it be.
The consensus is narrowly for a 25 basis points (a quarter percentage point) rise to 1.25 percent but the odds of a 50 basis point rise are put between 80 to 90 percent.
The reasons for the rise are familiar – rampant inflation at a 30 year high of 5.9 percent, and forecast to hit as high as 7.5 percent by the middle of the year, and a labour market that has gone from sizzling to red hot.
ANZ chief economist Sharon Zollner is at the hawkish end of the spectrum and said the RBNZ could not afford a softly-softly approach.
“The RBNZ has a big job to do to rein in runaway inflation, and the sooner they rip into it, the lower the economic cost is likely to be.”
RBNZ started ahead of most central banks in unwinding the COVID-19 easy money policies, with rate rises in September and November last year, and a third in February to 1 percent.
Reserve Bank governor Adrian Orr said a 50 basis point rise at the last meeting had been on the cards but the “finely balanced” decision had been based on a dose of caution ahead of the expected surge in Omicron.
Zollner said there was no easy option for the RBNZ.
“On the one hand, the path ahead for the economy is looking anything but smooth, with house prices falling and consumer confidence pummelled as household budgets are squeezed,” she said. “On the other hand, the wall of inflation is vertical and so far, completely unyielding.”
She said for the RBNZ’s own credibility as an inflation fighter and the future health of the economy, a hefty rise was needed with another 50 basis point rise in May, to minimise the risk of a later big hit to growth and employment.
Not so hard on the brakes
BNZ head of research Stephen Toplis said it was a toss of the coin between a smaller or larger rate rise but there was a case for a more gradual approach.
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