Westpac Economic Overview, February 2023 – Weathering The Storm

The Reserve Bank’s past efforts to tighten monetary policy will really come home to roost this year, according to Westpac’s latest Economic Overview.

“Homeowners with mortgages are now rolling onto much higher interest rates than before,” says Westpac’s Acting Chief Economist Michael Gordon. “That will prompt consumers to rein in their spending, and businesses to scale back their investment and hiring plans.”

“In time, this will see inflation fall back from its highs. But it will be an uncomfortable wait in the meantime, with a number of disruptive forces adding to prices in the near term.”

The destruction caused by January’s floods and Cyclone Gabrielle is difficult to gauge at the moment. But given its scale, the rebuilding effort is likely to create a draw on the nation’s resources over several years.

“However, we should be careful about making too much of what this means for interest rates,” says Mr Gordon. “The lesson from the Canterbury earthquakes was that conditions in the wider economy play a far greater role in determining inflation.”

“While the economy is running much hotter now that it was in 2011, we expect that to turn significantly in the years ahead as higher interest rates bite. And given the inherent lags in monetary policy, the Reserve Bank will need to start taking its foot off the brake even before inflation has returned to the target.”

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