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Highlights
- On Wednesday, the RBNZ will meet for monetary policy review.
- Economists divided over whether it will raise 25 bps or 50 bps
- Since rising inflation is the main concern, it is expected that the RBNZ will act tough and fast
Economists are divided as to whether the Reserve Bank of New Zealand (RBNZ) should raise interest rates by 25 or 50 basis points to head off rapidly rising inflation.
Most believe that the central bank in NZ is likely to take a more dovish stand as compared to the US Federal Reserve when it meets to review its monetary policy on Wednesday.
According to Kiwibank’s chief economist, the RBNZ won’t resort to a big interest rate hike due to the risk of a recession looming large. It is expected that it would likely stick to 25 basis point moves.
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Rising inflation the main concern
ANZ economists are expecting the RBNZ to raise interest rates very rapidly almost by 50 bps due to rising inflation.
According to Sharon Zollner, chief economist at ANZ, supply chain disruptions and a tight labour market have already pushed up the inflation to 5.9% in the last quarter. This is much above the central bank’s target of keeping inflation at 1-3% levels.
Related Read: What is the current state of inflation in OECD area?
Also Read: Housing imbalances & inflation causes of worry in NZ, says IMF
Besides that, the Russia-Ukraine war is also pushing up oil prices, which is having an impact on the overall cost of living for New Zealanders.
Zollner is of the view that the RBNZ should resort to a 50-bps hike as an aggressive hike is needed to bring the economy back to track.
According to Kiwibank’s chief economist, it is unlikely that RBNZ would be aggressive in this policy meeting as growth has become subdued due to Omicron-related lockdowns and the Ukraine-Russia war.
It may be recalled that the Reserve Bank of New Zealand has already increased the official cash rate thrice from 0.25% to 1%, in three consecutive increases.
In this scenario, how does the RBNZ act in its upcoming monetary policy statement? Why should it pay heed to those crying out for a speedy interest rate hike?
A fine balance
In this monetary policy review, the RBNZ is expected to create a fine balance between controlling high inflation and giving a boost to subdued growth.
However, economists believe that with 25 bps moves, the OCR will reach 2.50% or higher by the end of this year. This would still be below what it was in 2014 when the RBNZ delivered four consecutive quarter-point rate hikes.
RBNZ must act hard & fast
According to economists. inflation is running at the highest rate in three decades, therefore, the RBNZ must take tough measures to cool off inflation. Current policy settings are still stimulating the economy and could lead to further inflation. The central bank must act fast and hard. A bigger hike is in order to realign expectations and to stop pouring more fuel on already high inflation.
It is expected that the inflation would remain well above the RBNZ’s target range of 1-3% till the second quarter of 2023.
Also Read: NZ returns to growth in December quarter, GDP up 3%
As far as growth is concerned, the New Zealand economy returned to growth in 2021, after the restrictions were lifted, and is expected to grow 3.1% this year and 2.7% next year.
GDP data released in March testified that NZ was on the growth path as the economy emerged from COVID-19 lockdowns and the data supported that the central bank should go in for an aggressive rate hike in its April monetary policy review.
