MNI INTERVIEW: RBNZ Needs Neutral Rates Faster-Ex-Official

Another 50-basis point rate hike could come in May from the Reserve Bank of New Zealand to get ahead of the curve on a headline inflation rate expected to reach around 7%, but the current forecast end point for the Official Cash Rate in this tightening cycle is still valid, a former senior official told MNI.

Grant Spencer, a former deputy governor of the Reserve Bank of New Zealand, who left in 2018 after 11 years, told MNI in an interview that he believed that interest rate hikes would now “be steeper than anticipated” in the first half.

But he still expected the Official Cash Rate to peak at around 3.5% by late next year, as outlined in the OCR track published in February’s Monetary Policy Statement.

REALISATION ON INFLATION

The RBNZ yesterday raised rates by 50bps to 1.5%, after three increases of 25bps at meetings since October, see: MNI STATE OF PLAY: RBNZ Speeds Up Policy On Inflation Concerns.

“I think they have realised they have been slow on the job, and they have to get on with it, because they really should have been starting this whole process earlier,” said Spencer.

“The bank is realising there is a real risk that this high inflation will get embedded. On top of the underlying excess demand pressures, you have the additional COVID supply shortages and now commodity price pressures related to the conflict in Ukraine, and the more you push up headline inflation the greater the risk that inflation expectations will be affected.”

INFLATION PICTURE

NZ inflation in the last quarter of last year was at 5.9%, and Wednesday the RBNZ said it expected to be at “around 7%” in the first half of this year. The bank’s target for inflation is between 1% and 3%.

Spencer said that while he expects another 50bps increase in May, he does not believe the “end point” for rates will be much different from the OCR track outlined in February, though the MPS will be updated in May as well.

“But they really need policy to get back to neutral as quickly as possible to avoid higher inflation becoming a problem,” said Spencer. “Leaving it too long just makes it a tougher job.”

Asked if he believed the NZ economy risked a hard landing as last year’s buoyant housing market cools rapidly, Spencer said there were “no guarantees” of avoiding this but sharp rate rises now improved the chances of landing softly.

“The sooner you get on top of inflation the less likely you will have to take stronger action later,” he said. “If you make it a slow grind then it will take ages to get on top of the problem.”

HOUSING AND PANDEMIC

Regarding the impact of weakening house prices, Spencer said that sharp declines in lending and new buying activity would have a big impact on consumer confidence, with the result that domestic demand could slow faster than previously thought.

This economic impact however could to some extent be offset by the strength of exports due to strong commodity prices and as New Zealand lifts pandemic restrictions and opens again to tourism flows, Spencer said.