ANZ predicts 'painful' rise in interest rates

Photo: ODT files.
Photo: ODT files.
New Zealand's largest bank is predicting interest rates will have to rise much further than it has previously forecast, as central banks face an uphill battle to contain inflation.

On Wednesday ANZ said it now predicted that the benchmark official cash rate (OCR) will rise to a peak of 3% over the next 15 months, up from the current 0.75%.

Previously ANZ had forecast that the OCR would peak at 2% in the current cycle.

In early 2020 the Reserve Bank of New Zealand followed central banks around the world in slashing the OCR to a record low 0.25% and promised to pump money into the economy to maintain demand, amid worries that Covid-19 would hit business and consumer confidence and cause a deep recession.

While many economies did suffer a deep recession, New Zealand's economy, like many others, roared back to life as restrictions lifted, with spending boosted by Government grants and sharply rising asset prices.

Strong demand, coupled with supply disruptions and labour shortages have sent inflation surging. In the three months ending September 30, the consumer price index rose by 2.2%. Excluding quarters where GST was increased, it was the strongest quarterly increase in consumer inflation since 1987. Annual inflation hit 4.9%.

While many economists had earlier predicted that inflation was likely to be a temporary blip, ongoing supply problems and increasing signs that workers are demanding wage hikes to meet the cost of living are raising expectations that inflation will persist.

ANZ said inflation figures due out later this month could show the CPI rose close to 6% at the end of 2021 and could continue to rise further through this year.

"It's looking less transitory by the day as inflation expectations rise and wage growth lifts," ANZ chief economist Sharon Zollner said.

In 2021 the RBNZ became one of the first central banks in the world to begin hiking borrowing costs as it attempted to counter rising prices, with 0.25 percentage point hikes in October and November.

Already mortgage rates have swung sharply higher from the record lows of 2020, as banks anticipate further increases this year, putting pressure on households that borrowed to take advantage of rising house prices.

Zollner said the move in the OCR was likely to be painful, but the Reserve Bank had little option.

"Given the current level of house prices and household debt, an OCR of 3% might be seen as having too high a growth cost to even contemplate," she said.

"The fact is, however, that globally, prolonged strong monetary and fiscal stimulus in response to what turned out to be a net negative supply shock has unleashed the inflation dragon. Central banks now have to do what's needed to bring inflation down, painful as that may be."

Comments

When New Zealand changes government to one with Ministers with actual worldly experience, and not a piece of paper from a university, then we will see a change for this once wonderful country.
This Labour Government has hid behind Covid for long enough.
The cracks are starting to show, large interest rate rises will be the last and final straw, of Kiwis' wellbeing.

In short, our 'expert' elites, following Western 'expert' elites, who followed China's 'expert' totalitarian elites made a hash of lockdowning down and fiscally stimulating our societies at the same time, thus creating inflation which has driven asset prices (housing) beyond the reach of most of the next generation (self induced, generation specific, long Covid syndrome) so will now bleed the economy to correct their error.
Add to that their efforts to save the planet and we are in for a very rough ride.
The good news is that our elites will not be effected and they, as always, do this with the best of intentions for your health, safety and the prosperity of future generations.
They are truly kind souls and very Woke!!!

This is why bank lenders, won't let FHB's buy a coffee anymore. They know full well the 'pain' that is about to sweep the nation...

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