Vivek Maishra

BENGALURU (Reuters). New Zealand’s central banks will raise rates at its Wednesday meeting. They also plan to keep up their tightening pace next year, as they try to control rising inflation.

The economy has recovered strongly thanks to large amounts of fiscal stimulus and monetary stimulation that were injected to relieve pandemic pain. Inflation is now at its highest point and unemployment to its lowest level in more than a decade.

This has caused financial markets to forecast a number of interest rate hikes for next year. Economists mostly predicted the same.

Only two of the 23 economists polled by Reuters between Nov. 15-19 predicted that the Reserve Bank of New Zealand would increase the official cash rate 25 basis points, to 0.75%, at its Nov. 24-policy meeting. A 25-basis point increase is also fully priced in the markets.

Both dissidents anticipated a 50-basis point increase.

RBNZ does not have the luxury or time of other central banks. “They are in a hiking cycle, they have already seen one rate increase, and we will see another next week, I believe that they will raise at every meeting until next year,” Jarrod Kerr from Kiwibank, chief economist.

“The economic climate has become much more hot than what the RBNZ anticipated… The decision to increase interest rates was partly due to excesses in the housing sector.”

Capital Economics’ economist Ben Udy forecasts Wednesday’s 50-basis point RBNZ hike. This would, if realized, bring rates back up to 1.00% pre-pandemic levels.

Udy explained that because every measure of inflation the bank tracks is at or above its target level, more monetary tightening was needed.

Medians expect the OCR to reach 1.75% at the end of the year, and 2.0% by 2023. It is nevertheless lower than the OCR of 2014, when there were four consecutive quarter-point rate hikes by RBNZ.

The third quarter saw New Zealand experience 4.9% annual inflation, which is the highest rate in over a decade. This was due to housing-related expenses and other supply limitations.

The RBNZ also warned that more persistent inflationary pressures and any increase in inflation expectations https://www.reuters.com/article/newzealand-economy-inflation/update-1-new-zealand-inflation-expected-to-rise-in-q4-rbnz-survey-idINL1N2S904F, coupled with weaker growth, could lead to a sudden tightening in financial conditions.

On the other hand, the jobless rate https://www.reuters.com/business/cop/new-zealand-unemployment-rate-drops-record-low-q3-2021-11-02 fell to 3.4% in the third quarter, matching its lowest on record from December 2007. This was at the exact same time as the U.S. fell into deep recession following the burst of the housing bubble.

The central bank will consider New Zealand’s hot housing market when deciding on monetary policy. Recently, they said that house prices are higher than their sustainability level. This increased the likelihood of a correction.

House prices have nearly doubled in the last seven years and are the most unaffordable https://www.reuters.com/world/asia-pacific/growing-supply-will-bring-down-new-zealand-house-prices-says-rbnzs-orr-2021-11-01 among OECD nations due to a chronic housing shortage, historically low interest rates and cheap access to capital from the government’s pandemic-driven stimulus spending.

Sharon Zollner is chief economist of ANZ.

“On balance the case is for tighter monetary conditions.”