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Westpac Economic Overview, November 2021 – We Have Lift-off

Westpac’s latest Economic Overview finds that in many respects the New Zealand economy has continued to launch ahead in recent months. That is despite the setback of the Covid-19 outbreak that began in August.

“Businesses were better positioned to deal with lockdown this time, and have continued to push on with investment and hiring,” said Westpac’s Acting Chief Economist Michael Gordon. “We expect that activity will return to its previous strong levels as restrictions are eased.”

However, our strong economic performance has allowed the conditions for a sustained period of higher inflation to build up in a way that we haven’t seen for many years. “Activity was running well ahead of pre-pandemic levels before the latest outbreak, and the labour market is extremely tight,” said Mr Gordon.

“In that light, the debate over whether recent price shocks will prove ‘transitory’ is beside the point. These shocks may simply be the catalyst for an ongoing cycle of wage and price rises, driven by strong local conditions.”

For this reason, the Reserve Bank has been among the first central banks to achieve interest rate lift-off since the pandemic began. “We think that the Official Cash Rate will need to rise to 3% over the next couple of years, to bring demand and inflation back down to earth,” said Mr Gordon.

One of the major channels through which interest rates work to cool demand is through the housing market. “We expect house price growth to slow significantly in the coming months, turning to moderate price declines by late 2022,” said Mr Gordon. “Even so, on our forecasts it would take several years just to bring house prices back to where they were at the start of 2021.”

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