Westpac Economic Overview, May 2022 – The Right Amount Of Pressure
Westpac’s quarterly Economic Overview finds that economic growth is set to slow both in New Zealand and around the world, as central banks come to terms with what’s needed to bring inflation under control.
“The challenge the Reserve Bank faces is in applying the right amount of pressure,” says Westpac’s Acting Chief Economist Michael Gordon. “Too much, and it could inflict significant pain on household budgets and risk tipping the economy into recession. Too little, and inflationary forces could get out of hand, requiring an even more painful adjustment in the longer term.”
Westpac now expects the Official Cash Rate to reach a peak of 3.5% by the end of this year, from a previous forecast of 3.0%. “We expect that to include a series of 50 basis point increases in the coming months,” says Mr Gordon. “The Reserve Bank has recognised the value of early action to reduce the risk that even higher interest rates are needed in the future.”
Mr Gordon notes that higher mortgage rates are already working to cool down the housing market. In addition, higher debt servicing costs and the rising cost of living mean that households’ budgets have been significantly squeezed compared to a year ago.
This pressure is a necessary part of bringing demand in the economy down to more sustainable levels, says Mr Gordon. “We’re not talking recession, but we do expect some fairly lean growth in household spending in the year ahead, as other sectors such as international tourism take up the growth baton.”