New Zealand May Open Rate-Hike Door Amid Signs Economy Is Overheating

New Zealand’s central bank may signal it’s willing to begin tightening monetary policy later this year as a slew of strong data suggest the economy is overheating.

The Reserve Bank will leave the official cash rate at 0.25% at its review Wednesday in Wellington, according to all 24 analysts surveyed by Bloomberg. But economists at the country’s four largest banks now predict the RBNZ will start raising rates in November, and they expect it to tacitly acknowledge that possibility in its statement.

“The RBNZ can tick all its boxes -- inflation risks have flipped firmly towards it being too high for too long, and we think the labor market is at least at, possibly past full employment,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “We don’t need any more demand in this economy right now. I think it is overheating.”

Investors ramped up rate-hike bets last week after a survey of business opinion showed increasingly confident firms are passing on higher costs by raising prices. At the same time, considerable risks remain. New Zealand’s border is still largely closed to the outside world and a slow vaccination roll-out has left it vulnerable should Covid-19 breach its defenses.

New Zealand May Open Rate-Hike Door Amid Signs Economy Is Overheating

The RBNZ’s Monetary Policy Committee, led by Governor Adrian Orr, will publish its decision at 2 p.m. in Wellington tomorrow. It is an interim review, not a quarterly Monetary Policy Statement, so no new forecasts will be published and Orr will not hold a press conference. In May, the central bank projected it would start raising rates in the second half of 2022.

Stimulus Withdrawal

New Zealand’s success in eliminating the coronavirus from the community has given its economic recovery a head-start, putting the RBNZ at the forefront of stimulus withdrawal in the wake of the pandemic.

It has already dialed down its quantitative easing bond buying to just NZ$200 million ($140 million) a week from a peak of NZ$1.8 billion last year, and several economists say purchases could end within months.

While some other central banks are also signaling an end to ultra-loose policies by tapering bond purchases, in Asia only the Bank of Korea has said that rate normalization is in the pipeline this year. By contrast, the Reserve Bank of Australia last week said it doesn’t expect to increase borrowing costs until 2024.

The economy is running hot amid a shortage of goods and labor and surging demand. Gross domestic product jumped 1.6% in the first quarter from the fourth, three times the pace forecast by economists, while the housing market continues to boom despite government efforts to curb property investment.

The unemployment rate fell to 4.7% in the first quarter, and economists expect data due July 16 to show the inflation rate almost doubled to 2.7% in the second quarter, nearing the top of the RBNZ’s 1-3% target range.

The central bank will want to be sure that faster inflation is becoming entrenched, and may be wary of putting upward pressure on New Zealand’s exchange rate by tightening policy much sooner than its peers, said John Carran, an economist at Jarden Group in Auckland.

“They need to take a bit more time to see how long these labor market pressures and other cost pressures develop and whether they are going to flow through into significantly higher wages,” said Carran. “I don’t think there is enough evidence to say the spike in inflation will persist, and to justify the RBNZ raising rates.”

But Craig Ebert, senior economist at the Bank of New Zealand in Wellington, said inflation will continue to track higher over the course of the year and the jobless rate will fall further. BNZ forecasts inflation reaching 3.3% in the fourth quarter and the unemployment rate dropping to 3.8% by mid-2022.

“It’s the outlook for inflation, and the labor market, that will end up forcing the bank’s hand on the OCR,” said Ebert. “While risks of economic disappointment lurk,” there are now “palpable threats imposed by an overheating local economy,” he said.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.