Vivek Maishra

BENGALURU, (Reuters) – New Zealand’s central bank will increase rates on Wednesday for its second consecutive meeting. It also plans to continue tightening next year in an effort to curb rising inflation and calm the overheated housing markets. A Reuters poll revealed that this was true.

To alleviate the pandemic pain, large quantities of fiscal and monetary stimulus have helped to strengthen the economy and driven inflation to its highest levels and jobless rates to their lowest for over a decade.

Financial markets have reacted to this by pricing in interest rate increases through the next year, which economists have generally predicted.

A Reuters poll of economists conducted between Nov. 15-18 found that only one of twenty predicted that the Reserve Bank of New Zealand will raise its official cash rate to 0.75%. This was according to a November 24th Reuters poll. A 25-basis point increase is also fully priced in by the markets.

One dissident expected an increase of 50 basis points.

The RBNZ is not like other central banks and doesn’t have time to spare. “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 predicts that the RBNZ will increase rates by 50 basis points on Wednesday. If this happens, it would return rates to 1.00%, as they were before the pandemic.

Udy explained that because every measure of inflation the Bank monitors has been around or above Bank target it is obvious that more tightening of monetary policy is required.

Medians project the official cash rates (OCR), to rise to 1.75% next year and 2.0% by 2023. This is still below the rate of 2014. It was lower than it was after four quarter-point rate increases by RBNZ.

New Zealand saw its annual inflation rise to 4.9% during the third quarter. It was driven by rising housing costs and other constraints.

RBNZ warns that persistent inflationary pressures as well as any rise in inflation expectations and weaker growth could cause a tightening abruptly in financial conditions.

However, the unemployment rate dropped to 3.4% during the third quarter. This is the lowest recorded since December 2007. This was at the exact same time that the U.S. economic system fell into deep recession following the burst of the housing bubble.

The central bank will be considering New Zealand’s hot housing market when it makes its monetary policy decisions. It recently stated that house prices in New Zealand are at an unsustainable level, increasing the likelihood of a correction.

In the seven last years, house prices nearly doubled and they are now the least affordable OECD countries due to a persistent housing shortage and historically low interest rates. Also, the government’s panademic-driven stimulus spending has made it very difficult to access capital.

Sharon Zollner is chief economist of ANZ.

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