New Zealand’s Run at Inflation That is far more hawk than dove

New Zealand’s Run at Inflation That is far more hawk than dove – If New Zealand is any indication, a significant dovish tilt by central banks is still some time away. One of the most aggressive interest rate hikers in the world indicates that the fight against inflation will continue unabated. The possibility of a slowdown, or possibly a recession, is not discouraging. If anything, authorities in Wellington are becoming more bellicose. In the end, there will be a price to pay.

New Zealand outperforms its weight class in the financial arena: Three decades ago, the Reserve Bank set a formal inflation goal, which was uncommon at the time but is now a common anchor. While the Federal Reserve, Bank of England, and European Central Bank were still determining whether to terminate quantitative easing, the RBNZ was among the first to halt pandemic-era support and implement a series of abrupt rate rises. It is prudent to pay attention to what New Zealand policymakers say and do.

If global central banks overreact and kill economic growth in an effort to regulate prices, New Zealand’s tiny, open economy would undoubtedly feel the repercussions. This is a problem for another day. Another substantial rise in borrowing rates is imminent.

There are few indications that the RBNZ is pondering the death of the recovery. The bank raised its benchmark rate by 0.5 percentage points to 3 percent on Wednesday, the fourth straight increase of this size. The bank predicts that the prime rate will reach 3.69 percent by the end of this year and slightly over 4 percent in the second quarter of 2023. This is a higher peak than anticipated, coming earlier. Where does this tightening result in? According to Bloomberg Economics and other analysts, there will be a need for rate reduction later in 2019.

First, combat inflation, argues Wellington. The labor market, which represents the economy as a whole, can manage it. The bank said, “It remains reasonable to continue tightening monetary conditions quickly.” “The core rate of inflation for consumer prices is too high, and labor resources remain limited.” At 7.3%, inflation is significantly beyond the planned range of 1% to 3%. This is a bad performance for a country that loves to brag about its pioneering inflation objectives.

Inflation is uncomfortably high in practically every country, including the RBNZ. Even Japan, which has battled deflation intermittently for a generation, is seeing a price increase. But few nations have attempted to combat inflation with as much vigor as New Zealand. The Bank of Korea began its monetary policy two months earlier, but has mostly used quarter-point adjustments. The BOK did increase rates by 50 basis points in July, but stressed that this was not the norm.

New Zealand's Run at Inflation That is far more hawk than dove
New Zealand’s Run at Inflation That is far more hawk than dove

 

Despite the RBNZ’s acknowledgement of “global and local challenges,” employment demand remains high and consumer spending is “resilient.” That does not imply that danger is not brewing: The unemployment rate has increased from historically low levels, and the property market is declining. Governor Adrian Orr predicted that home values would continue to decline. To persuade Orr to change direction, further general weakness is required. Even so, such a cooling would need to halt price pressure in order to prompt a significant policy move.

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Like many other monetary authorities, the New Zealand central bank is responsible for supporting the labor market. You might be excused for assuming that just one is significant these days, just as encouraging development was all the rage during Covid’s heyday. In this respect, New Zealand is hardly an anomaly. According to Bank of America Corp’s most recent monthly poll of fund managers, investors see a less forceful approach and believe inflation has peaked.

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