Analysis: New Zealand central bank’s aggressive tightening raises fears it’s going too far

  • New Zealand to raise rates by 50 basis points for third consecutive meeting on Wednesday
  • Clamp dash is the most aggressive in over two decades
  • Concerns are growing RBNZ could go too far and tip the economy into recession
  • Markets are starting to price lower for the policy rate

WELLINGTON, July 11 (Reuters) – New Zealand’s central bank is set to hike rates by half a point for the third consecutive time this week in its most aggressive tightening policy in more than two decades, but Growing signs of a potentially brutal economic downturn could temper hawkish rhetoric. dash.

Collapsing confidence and weak economic data have the market wondering if the Reserve Bank of New Zealand (RBNZ) will do more harm than good in its combative quest to contain soaring inflation.

“Monetary policy works with a lag: it affects confidence, then activity and finally inflation,” said ANZ chief economist Sharon Zollner.

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“So focusing on those inflation indicators, they’re driving looking in the rear view mirror, which tells you there’s a good chance they’ll miss the stop and end up over-tightening.”

A pioneer in pulling back pandemic-era stimulus among its peers, the RBNZ’s hawkish move to rein in the highest inflation in three decades, at 6.9%, has already seen rates rise 175 points basic since October. Read more

A 50 basis point rise in Wednesday’s Policy Review means they will have increased tenfold from a record low of 0.25%. And economists forecast another half-point hike in August, making it the most aggressive policy tightening since the introduction of the official exchange rate in 1999. read more

RBNZ Governor Adrian Orr said moving early and fast remains the best path for the central bank to achieve its key inflation and employment targets. (nP8N2VA01J)

But the problem – and one that other central banks such as Australia and South Korea may also face as they progress through their own up cycles to rein in runaway inflation – is that rapid change creates a real risk of tipping the country into a recession.

THE ECONOMY SLIDING, CONFIDENCE REACHED

“More companies are facing high costs, and more companies – almost the same proportion – raised prices in June, so all this points to further intensification of inflationary pressures, so the Reserve Bank will continue” , said Christina Leung, senior director. economist at NZIER.

However, a series of weak economic data saw the market reverse its expectations that the central bank would implement its plan to double the cash rate over the next year.

Latest Reuters poll has rates at 3.50% for the whole of next year, below RBNZ forecast in May for rates to climb to 4.00% by mid-year next. Read more

Reflecting the evolution of market prices, three of the biggest banks last week cut their two-year mortgage rates by about 30 basis points.

The economy unexpectedly contracted by 0.2% in the first quarter, and ANZ’s Zollner said it was unclear whether the economy grew in the second quarter or slipped into recession . Read more

Soaring inflation – and inflation expectations – and the lack of wage growth are weighing on household demand. Meanwhile, the once hot property market has now fallen around 9% since November and further declines are expected.

A survey showed that business confidence had fallen to its lowest level since the start of the COVID pandemic, with two-thirds of businesses expecting conditions to deteriorate, while another showed that business confidence consumers was the lowest in the series’ 34-year history.

“The real economy has deteriorated relative to that on which the RBNZ based its May rate path,” Bank of New Zealand economists said in a note.

If the central bank were to release a full rate track this week, “there would have been plenty of talk about possibly moderating the pace and depth of the tightening cycle.”

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Reporting by Lucy Craymer Editing by Shri Navaratnam

Our standards: The Thomson Reuters Trust Principles.

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