Is Inflation likely to take a breather by the end of 2022?

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Is Inflation likely to take a breather by the end of 2022?

 Is Inflation likely to take a breather by the end of 2022?
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Highlights

  • Rising inflation is becoming the main concern in New Zealand
  • Tomorrow’s numbers could take the inflation rate to 7%
  • RBNZ Governor Adrian Orr told IMF that the Bank was `not in great place’

inflation is set to rise when StatsNZ releases its data on Thursday. Even Finance Minister Grant Robertson ahead of the StatsNZ announcement said that he expected inflation figures to rise Thursday.

Most economists and analysts are predicting an increase in inflation this quarter and next. Grant Robertson said that the inflation rates in the US and the UK were hitting an 8%, and it was likely to be at least 7% in New Zealand also.
He said that inflation would be rising throughout the world but what was being debated was by how much?

The Russia-Ukraine war and the COVID-19 pandemic have had an adverse impact on economies across the world. Disruptions in global supply chains, rising fuel costs and lockdowns have all led to adverse business conditions. All this has given rise to another monster-high inflation. Central Banks around the globe are trying to bring this monster under control.

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It is becoming obvious that inflation will be rising throughout the world and in New Zealand, but at what rate will it peak is the big question?

Central Banks all over the world have increased interest rates and cut down on monetary stimulus to curb the money supply. Last week, the Reserve Bank of New Zealand shocked economists by increasing the OCR by 50 bps, taking it to 1.5%. That is the only monetary policy tool that the Central Bank has to curb inflation. It has already increased the rates three times by 25 bps. 

Central Bank in a difficult position

Omicron concerns and the ongoing war between Russia and Ukraine have added to uncertainty and inflation is fueled mainly by global factors like a hike in petrol prices due to the demand-supply mismatch in Brent crude. Therefore, the easing of inflationary pressure is not in sight till the end of the year.

If inflation keeps soaring, the Reserve Bank would have to take a more hawkish stance and increase interest rates aggressively which could have an impact on growth. It would have a negative impact on interest rate-sensitive sectors such as real estate and other capital-intensive sectors. Most banks in New Zealand have already increased their mortgage rates making it difficult for first home buyers.

Earlier this week, Reserve Bank governor Adrian Orr told the International Monetary Fund (IMF) that the Bank was not `in a great place’ ahead of new numbers due Thursday that could see inflation jump above 7%.

Along with the rising cost of everything from food to services, homeowners who owe money to banks are getting ready for higher home loan rates.

Inflation top concern

Inflation has emerged as one of the top concerns for central bank reserve managers. Rising inflation is the main risk for the global economy. Failure to end the pandemic and the war between Ukraine and Russia will fuel inflationary pressure further. However, many analysts and bankers feel that the rising inflation may be transitory. The Central Bank would have to raise interest rates aggressively this year.

Bottom Line

Inflation is yet to peak in New Zealand. With new numbers to be announced tomorrow, the official inflation figure could be above 7%. Even though the Central Bank has raised interest rates four times, inflation is seeing an increase with chief spoilers in the party being the Russia-Ukraine war and the Omicron variant.  The Central Bank has a difficult task ahead ---balancing growth and inflation.

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