Reckless Rate Hikes Unwarranted

• The war in the Middle East isn’t over yet. And we don’t know when it will end. And even when it does, it will take months to return to normal. The real threat that remains, is the risk of a true knockout punch, that would come from a domestic fuel shortage. The heightened uncertainty is causing businesses and households to bunker down. Raising interest rates is tone deaf, and potentially reckless. Both businesses and households are struggling with increased costs, not surging demand.
• Any rise in the costs of essentials will feed into inflation short term, but cost increases will push demand down and put down-ward pressure on growth. We are likely to see a contraction in economic activity in the current quarter. And we won’t see this played out in the data for months to come. Q2 CPI isn’t out until July, after the RBNZ’s decision, and to know if inflation sticks around we really need to see Q3 data at the very least.
• In our view, the RBNZ’s best course of action is to watch, wait, and weigh up the facts once they have the information in front of them. Households and businesses who’ve already seen their costs rise don’t need a rise in interest rates to dampen their demand – because this is not a demand story, this is not Covid. Raising interest rates risks a repeat of past mistakes, potentially inducing a recession. It could be reckless.

Trump’s failed peace talks over the weekend have us worried about inflation and most importantly, how Kiwi businesses are meant to weather yet another punch in the guts from inflated fuel prices. We speculate over the length of the conflict and already, we are looking to 2027 for an economic recovery – it feels like this year is similar to last.

The war in the Middle East isn’t over yet. And we don’t know when it will end. And even when it does, it will take months to return to normal. The real threat that remains, is the risk of a true knockout punch, that would come from a domestic fuel shortage. And it is still a serious threat. The heightened uncertainty is causing businesses and households to bunker down. Confidence has been hit, and so to have investment intentions and hiring. Raising interest rates is tone deaf, and potentially reckless. Because both businesses and households are struggling with increased costs, not surging demand.

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