MNI INTERVIEW: RBNZ To Opt For "Short Term Pain" On Inflation

A 50 basis point hike in official interest rates in New Zealand this week was the “sensible middle ground” for the central bank, a former RBNZ official has told MNI.

Sharon Zollner, the RBNZ’s chief economist for eight years to 2006, said cases could be made both for 25bps and 75bps increases in the Official Cash Rate, but a 50bps rise to 2.5% this week was the “path of least resistance” as the RBNZ focuses on controlling inflation.

“You could certainly make a case for 25bps on low confidence, and you can make a case for 75bps on the fact that inflation pressures have yet to show any sign of waning at all,” said Zollner, who is now the chief economist at ANZ Bank. She said 50bps would “avoid any unnecessary volatility” in the market, which was in agreement on the pace of rate hikes. She also forecast another 50bps rise in August.

RBNZ VIEWS

The RBNZ took the OCR down to the record low of 0.25% during the pandemic and asked commercial banks to get ready for zero rates. It has now hiked 175bps since last October and in addition to a 50bps hike expected this week more increases are expected later this year, (See: MNI STATE OF PLAY: RBNZ Wants 'Least Regrets" On Policy Views).

NZ inflation came in at 6.9% in the March quarter and is expected to go higher in the June quarter.

Zollner said that while there was growing talk of a recession in NZ, the RBNZ appeared willing to take this risk “to avoid putting themselves in a situation where they require a horrible and sharp increase” in the future.

NO PAIN, NO GAIN

NZ’s economic growth slowed down significantly in the first quarter of 2022, with the economy shrinking 0.2% even though annualised growth is at 5.1%. A negative result in the second quarter would push the economy into a technical recession, despite an unemployment level of 3.2%.

“In the 1991 recession we had unemployment go into double digits, but you don’t want to have to go through that ever again,” said Zollner. “So, I think they are willing to inflict some short term pain for long-term gain.”