What To Expect Next From NZ Interest Rates?

Tuesday, 5 April 2022, 4:41 pm
Article: Kalkine

Summary

• The Russia-Ukraine war has aggravated inflationary pressures for households and worsened supply-side disruptions.
• Interest rate rises could mean further uncertainty for households, especially for those with high debt levels.
• The fear of missing out has been receding in homebuyers, with property prices taking a breather in the market.

Rising inflation has created a precarious situation in New Zealand, much like that seen in the rest of the world. With the Russia-Ukraine war ensuing in the backdrop, inflationary concerns have aggravated amidst increasing global supply chain disruptions. The existing supply-side bottlenecks are majorly due to the sanctions placed on Russia by many western countries. The NZ economic outlook has become clouded in the given scenario, especially pertaining to interest rates.

While the central bank has already embraced interest rate hikes, higher inflation might induce the Reserve Bank of New Zealand (RBNZ) to tighten monetary policy further. The central bank commonly uses interest rate hikes as a tool to control higher lending and money supply in the economy.

In fact, the central bank’s decisions have become more important than ever, especially at a time when geopolitical concerns are taking no breather. Now, the onus lies on the RBNZ to help households combat inflation without letting the supply-side shock interfere with economic growth. The RBNZ’s next monetary policy review is due on 13 April 2022.

GOOD READ: Housing imbalances & inflation causes of worry in NZ, says IMF

Large cost increases ahead?

Consumer expenses have been hit hardest by the ongoing Russia-Ukraine conflict. The war has led to a sharp uptick in oil and gas prices, which is having a remarkable impact on the prices of commodities. Additionally, with high demand for goods and services, producers are facing difficulty in maintaining market equilibrium, putting further pressure on prices.

Any additional interest rate rise by the RBNZ could mean uncertainty for households, especially for those with high debt levels. Households are already dealing with affordability concerns amidst rising property prices, backed by booming property demand. Wages have also not kept pace with ongoing price increases in the real estate and commodity space.

Given the pressing outlook for consumers, certain experts suggest that an interest rate hike can make the situation more challenging. Consumers might be forced to use their savings, cut discretionary spending, and reduce expenditure on food and transportation. Thus, the RBNZ is facing the risk of reduced household spending, which could cause a demand-side shock and result in an economic slowdown.

Will monetary policy tightening be aggressive?

The prevailing war conditions have intensified inflationary pressures and could prompt a reduction in consumer spending. In such a situation, the RBNZ might not be able to take a highly aggressive route in its interest rate policy. This means that the central bank could remain steady on its previous stance regarding interest rates without tightening the monetary policy aggressively.

Several market forces have already slowed the momentum seen in the economy after the pandemic-induced restrictions eased. These factors might become more pronounced with time, further reducing the need for a monetary policy tightening. Most importantly, rising oil and commodity prices have dampened future spending outlook for households.

There is also a significant easing seen on the demand side of the real estate markets. The fear of missing out has been receding among consumers. Meanwhile, one cannot neglect that most of the mortgage loans for owner-occupiers are fixed-term, which are due to be re-fixed in less than two years. Effectively, this could double the interest rates on the mortgages held by many people in a short span of time. Thus, interest rate hikes may not directly impact housing prices but could have an adverse impact on households.

In a nutshell, aggressive interest rate tightening might do more harm than good for the economy, given the current scenario. Fears loom that the central bank could end up making the economic situation complex by taking a faster route up. It seems crucial for the central bank to move cautiously with interest rate rises while helping households adjust to increasing cost pressures.

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