MNI INTERVIEW: RBNZ Could Stop At 2.5%, "Shadow Board" Member

A member of a “shadow board’ of the Reserve Bank of New Zealand believes the central bank could stop raising interest rates when they reach 2.5%, and not go beyond 3% as forecast by the latest guidance as it manages a potential tricky balance of a weaker economy and energy-driven inflation.

Jarrod Kerr, the chief economist of publicly owned Kiwi Bank and a member of the shadow RBNZ board created by economic think tank the NZ Institute of Economic Research, said it is possible that a correction in the housing market combined with higher inflation due to energy prices could cool the NZ economy faster than expected, and higher interest rates may not be appropriate, see: MNI INTERVIEW: RBNZ Doesn't Need To "Front End" Hikes.

In an interview with MNI, Kerr said he favoured incremental interest rate hikes of 25 basis points for the Official Cash Rate (OCR), rather than the 50 basis points called for by more hawkish members of the ‘shadow board.’

“I just think they need to keep delivering on what they said they were going to do, and do 25 basis points each time,” he said.

“By the end of the year we are going to find ourselves in a situation where the housing market is correcting and as fuel prices increase it is going to be interesting to see how discretionary spending holds up. I think the RBNZ will stop at 3%, and if things deteriorate faster, they might stop at 2.5%.”

THE TRACK AHEAD

The OCR is currently at 1.0% after three 25 basis point rises at the last three RBNZ meetings, the last one earlier this month. The OCR track published in the RBNZ’s most recent Monetary Policy Statement has rates reaching 3% next year and going as high as 3.4% by 2024.

Kerr noted that house prices, which surged just over 25% on average in 2021, had fallen in the last two months and the price of petrol had increased in recent weeks to over NZD3 per litre. That means less consumer spending, cooling the economy, but there are also energy price implications for inflation, currently running at 5.9%.

Global crude oil prices surged above $100 a barrel in the wake of Moscow's invasion of Ukraine, which brought a wave of economic sanctions including a U.S. ban on Russian oil imports, adding to inflation concerns. How that mix of weaker economic activity and oil prices, which are excluded from the underlying inflation basket, plays out is the big question, Kerr said.

“We thought it (headline inflation) would peak in the mid 6% range, but this Ukraine issue has upped the game again,” Kerr said. “It’s going to cause inflation to spike even higher, and the peak is now likely at over 7%."

The next RBNZ policy review is scheduled on April 13.