Is New Zealand raising rates towards a recession?
Going to such a sacred place can allow the authority to pause and consider the effects of a relatively quick tightening. Many central banks are pushing rates higher: Federal Reserve officials have signaled they are considering a half-point move, the Bank of Canada could become more aggressive, while other strikes against the inflation are expected in Singapore and South Korea. New Zealand began the rush to higher rates earlier than most and Wednesday’s decision was the fourth in consecutive policy meetings. The RBNZ’s language echoed that of Richmond Fed Chairman Thomas Barkin, who hours earlier had spoken of the benefits of eagerly removing pandemic-era housing. “The best short-term path for us is to move quickly into the neutral range and then test whether pandemic-era inflationary pressures are easing and how persistent inflation has become,” Barkin said during a briefing. an event in New York. If anyone in Wellington was taking notes, I hope they scribbled in the margin that the Fed has barely started a series of hikes. The RBNZ is more advanced.
A more muscular approach is understandable. New Zealand was the first country to adopt an official inflation target, and New Zealanders are quick to remind people of that achievement. The country tends to raise interest rates quickly when there is an upturn, then sometimes undo that job almost as quickly when growth slows. Consumer prices rose 5.9% in the fourth quarter of 2021 from a year earlier, miles away from the 1% to 3% target. The unemployment rate is at a record high of 3.2%. The economy looks pretty hot from this perspective.
Take a second look and cracks appear. Consumer and business confidence has been hit, partly due to rising interest rates, but also due to the spread of omicron. Higher energy costs and Russia’s invasion of Ukraine don’t help. The real estate sector is collapsing: house prices are falling and some economists predict that they will fall by as much as 10% this year. This is bad news for growth, in general. “In total, nearly a quarter of New Zealand’s economy is directly dependent on the housing market,” Capital Economics’ Ben Udy wrote in a note last week. “Once the housing market begins to crash in earnest, the repercussions for the wider economy could be severe.” He expects rate cuts next year.
Equally critical will be the prognosis for the major economies. The recession is increasingly being discussed as the price the Fed has to pay for stifling inflation, one measure of which accelerated to 8.5% last month. Fears of a new crisis have risen in the investment community, according to a survey by Bank of America Corp. on fund managers published on Tuesday. “The combination of overheating, followed by policy lag, followed by supply shocks means I think this is a very tough set of challenges, and recession in the next two years is clearly more likely than not. “former Treasury Secretary Lawrence Summers told Bloomberg Television. Friday.
There isn’t a huge upside to moving ahead of the Fed only to get caught in its downdraft. New Zealand’s enthusiasm may have a price. More opinion from Bloomberg: Fed made US recession inevitable: Bill Dudley Yen plunge is Japan’s dilemma: Daniel Moss Do you know a good inflation hedge? Tell Me Please: Matthew Brooker
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ editor for global economics and led teams in Asia, Europe and North America.
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