Substantial price pressures are still feeding through New Zealand's economy, a former deputy governor tells MNI.
Reserve Bank Governor Adrian Orr noted last week in an interview with RNZ that global interest rates had likely peaked and cuts were getting closer, however, inflation expectations were still a concern. New Zealand dollar overnight index swaps market have priced in a 25-basis-point cut to the 5.5% OCR by August.
Nicholl noted that local governments across New Zealand were still increasing their rates by 10-20%, while insurance premiums were also rising fast. “There's a number of quite substantial price pressures coming through,” he said, adding mortgage holders will continue to feel pressure as they move on to higher rates.
Westpac estimates average mortgage rates will peak sometime in 2025. (See chart)
“There's a lot of pretty hefty and quite important price effects still coming through," Nicholl noted. "I expect inflation to moderate slower than the optimistic views from the Reserve Bank and the Treasury.”
The RBNZ has stated it does not expect rate cuts soon, despite lowering its peak official cash rate forecast in February when the monetary policy committee decided to hold. (See MNI RBNZ WATCH: RBNZ Leaves Rates On Hold, Downgrades OCR Peak) The Reserve last hiked the rate in May 2023.
WIDER MISSTEPS
Nicholl called on central banks in the developed world to renounce quantitative easing and their ability to conduct any similar action in future, arguing that the root cause of present inflation lay in unconventional policy action, such as bond-buying programmes.
He noted the RBNZ in particular, similar to other peer central banks, had come to believe it could solve any problem, rejecting the lessons and reforms of the 1990s and 1980s. Monetary policy had a comparative advantage over inflation, but was generally weak when focused on other issues, he added.
"But 30 years later, central banks lost that humility and certainly thought they could solve every problem in the world and when the first-round policies didn't work, they doubled up and doubled up again," he noted. "I blame the central banks for actually creating the inflation problem that they're now trying to solve."