Reserve Bank Governor Adrian Orr and bank executives. Photo: Getty Images

Warnings of top-of-the-range 3 percent inflation through winter and into spring, emboldening central bank to finally pull back from stimulus

ANALYSIS: Lock in those low mortgage rates. Stock up the pantry with essentials. And ready yourself for politicians, not central bankers, to decide where to put public money.

True, 3 percent rates of inflation and interest won’t blow most budgets, but the increases do mark a turning point. After years of low interest rates and low inflation, New Zealanders are warned it’s time to lose their complacency.

Banks are beginning to raise their interest rates as their economists warn them of a hike to the official cash rate, perhaps as early as next month.

Coming two days ahead of the official inflation figures – tipped to touch the top of the Reserve Bank’s 1 to 3 percent range – the Bank’s monetary policy statement anticipates increasing heat in the economy . And the banks agree.

What do you think? Click here to comment.

ASB chief economist Nick Tuffley says an August rate hike looks more likely than not, if key upcoming data confirm that pressures are building.

“It’s a prudent time for households and businesses to review their interest rate exposures,” Tuffley says, “to make sure they are appropriate and start thinking about what higher interest rates mean for you.”

And Kiwibank chief economist Jarrod Kerr is close behind, joining others in cautiously tipping a November hike. “The next move is almost definitely going to be a hike, unless of course Covid strikes us hard, again,” he says.

After months in which the Reserve Bank has protested that the economic recovery remained fragile, this week its monetary policy committee acknowledged the greater risk lay in overheating.

Figures this week showed food prices and rents were both rising faster than they have in years. Petrol and electricity prices have already climbed dramatically this year. Wages are rising (albeit with an inevitable lag) and new Real Estate Institute data shows house prices are stubbornly resistant to attempts by both the Government and the Reserve Bank to rein them in.

The Bank announced that next week it would end the long-term asset purchase programme, also known as quantitative easing or, more colloquially, money printing. Wholesale rates markets responded in minutes, pushing swap rates about 4 to 5 basis points higher.

Kerr said that swift end to the stimulus scheme demonstrated a more hawkish approach, and was ahead of market expectations. It effectively reduced the anticipated stimulus in the bond market immediately. “At the same time, the Reserve Bank acknowledged the temporary nature of the current inflation shock,” he said.

The Bank was juggling near-term inflation pressures and long-term deflationary forces, he argued. “We are still in the beginnings of our vaccine rollout, and much of the inflation pressure we’re experiencing should be deemed transitory.”

The Bank predicted inflation spikes in the quarterly data being published by Stats NZ this Friday, and again in the current July-September quarter.

A sceptic might suggest that high inflation numbers in two consecutive quarters constitutes more than two blips and rather, one big hump that is hard to disregard.

Certainly, the Bank’s statement did describe the various price rises as mostly ephemeral. “These reflect factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration, such as supply shortfalls and higher transport costs,” the statement said. “However, the Committee noted that uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well anchored inflation expectations.”

The Monetary Policy Committee noted medium-term inflation and employment would both likely remain below the objectives set in its government remit, in the absence of ongoing monetary support.

At property data agency CoreLogic, chief property economist Kelvin Davidson said the decision to keep the official cash rate unchanged at 0.25 percent came as no surprise, and in reality its move to halt bond purchases as part of the large-scale asset purchase programme didn’t shock anyone either. “It’s a signal of tighter monetary policy to come, which has already been flagged by economists for a while now anyway,” he said.

“The next step in removing the emergency support for the economy will be an actual increase in the official cash rate, with timing still a bit uncertain – but potentially as early as November this year (or even a smaller chance of August).

“This is a tricky balancing act for the Reserve Bank, in trying to pre-empt a rise in inflation without pushing up the exchange rate too much, and hence dampening exports.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

Leave a comment