Analysis-New NZ central bank tightening stokes fears it could go too far According to Reuters

By Lucy Craymer

WELLINGTON (Reuters) – New Zealand’s central bank is expected to deliver its third consecutive half-point interest rate hike this week in its most drastic policy tightening in more than two decades, but the growing signs of the possibility of a sharp economic downturn could calm the hawks.

Declining confidence and volatile economic data are leading markets to question whether the Reserve Bank of New Zealand (RBNZ) is doing more harm than good in its quest to combat soaring inflation.

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

“So by focusing on those inflation indicators, they’re driving in the rearview mirror, which tells you there’s a pretty good chance they’ll miss the shutdown and end up tightening .”

A front-runner in pulling back on pandemic-era stimulus measures among its peers, the RBNZ’s hawkish attempt to rein in inflation is at its highest in three decades, at 6.9% , has seen rates have risen by 175 basis points since October.

A 50-basis-point gain on Wednesday’s policy review day means they’ll be up 10x from a record low of 0.25%. And economists forecast another half point increase in August, which would be the most drastic policy tightening since the official cash rate was introduced in 1999.

RBNZ Governor Adrian Orr said going 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 may also face other central banks like Australia and South Korea as they move further into their own growth cycles to reduce rampant inflation – is change. quickly created a real risk of sending the country into recession.

ECONOMY, HIGH CONFIDENCE

“Many businesses are facing high costs and many – almost equally – raised prices in June, so all that points to is inflationary pressures,” said Christina Leung, principal. increasingly increasing. economist at NZIER.

However, a flurry of weak economic data has seen markets reverse expectations that the central bank will follow through on its plan to double the cash rate next year.

The latest Reuters poll has a rate of 3.50% for the whole of next year, below the RBNZ forecast in May for the rate to rise to 4.00% by the middle of next year.

Reflecting changes in market prices, three of the largest banks cut two-year mortgage rates last week by about 30 basis points.

The economy unexpectedly shrank 0.2% in the first quarter and ANZ’s Zollner said it was a close call on whether the economy grew in the second quarter or slipped into recession.

Rising inflation – and inflation expectations – and a lack of wage growth are affecting household demand. At the same time, the once red-hot housing market has now dropped to its highest levels, having fallen about 9% since November with further declines expected.

One survey found that business confidence has dropped to its lowest level since the start of the COVID pandemic, with two-thirds of companies expecting a deterioration, while another survey showed saw consumer confidence at its lowest level in its 34-year history.

“The real economy has deteriorated from the level the RBNZ is based on tracking May rates,” Bank of New Zealand economists said in a note.

If the central bank releases full rates this week, “there will be considerable discussion about the possibility of adjusting the speed and size of the tightening cycle.”