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There's a risk the central bank could fall behind the curve on interest rates, former Assistant Governor Grant Spencer tells MNI.
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The Reserve Bank of New Zealand is likely to begin raising interest rates in August, hike again in November and take its official cash rate to 2% or more by the third quarter of next year, former RBNZ Assistant Governor Grant Spencer told MNI.
The speed of the NZ economy's rebound has been a surprise and it was now overheating, Spencer, who left the central bank in 2018 after 11 years, said in an interview. (see: MNI STATE OF PLAY: RBNZ Toughens Up In A Hotter Than Expected Economy - July 14)
"We also have very strong demand pushing restricted supply," said Spencer, who believes that inflation pressures will continue to be robust because of New Zealand's continued isolation as a result of the pandemic.
BEHIND THE CURVE, STRONGER KIWI
On interest rates, currently at a record low of 0.25%, Spencer said there was a "real risk of getting behind the curve" if the bank did not hike rates in August.
"The sensible thing to do would be to have a one notch increase at the next meeting, because they will try for a soft landing and that will require an incremental approach," said Spencer. Former senior RBNZ economist Sharon Zollner had also told MNI earlier this month that the RBNZ is poised for steady rate hikes into next year. (see: MNI INTERVIEW: RBNZ To Hike To 1.75% By End 2022 - July 16)
Spencer said the RBNZ would also be aware that moving earlier than other central banks would create a differential which could see the currency rise.
A stronger New Zealand dollar was another risk to the economy as it would impact negatively on the terms of trade, he said.
He also believed the RBNZ would soon end its Funding for Lending program, which has offered a cheap funding source for commercial banks. (see: MNI INTERVIEW: Rates, NOT QE, Main Tool For RBNZ-Hawkesby - June 1)
Although the programme has not been used extensively by the banks, it has played a role in keeping interest rates, and mortgage rates low, aiding a housing boom.
"If they remove it there may be some upward pressure on bank funding costs," said Spencer, who said a soft landing for the rampant property market was another challenge for the RBNZ.
"There is a risk of house price reductions, but I don't see a collapse, and without tightening that would increase the risk of a hard landing in that market."