Boosts the official rate to 3.5%
Kiwibank has forecasted when the Reserve Bank next meets on October 5th, the RBNZ is set to hike the cash rate by another 50bps to 3.50%.
This will make for the fifth consecutive 50bp hike, with Kiwibank predicting a further 50bp rate lift again in November, taking the official cash rate to 4%.
The factors resulting in this forecast include aggregate demand remaining too high relative to the Kiwi economy, supply factors such as chronic staff shortages and delays in deliveries of materials which are keeping productive capacity constrained, along with a continued tightening of monetary conditions remaining justified, for now.
Kiwibank chief economist Jarrod Kerr (pictured above) said Kiwibank believed the RBNZ was gaining significant traction in their monetary tightening.
“Many mortgagees are rolling off very low rates and onto much higher rates in the next three – six months,” Kerr said.
“Unfortunately, the RBNZ needs to see this pain in households before they are confident they’ll beat inflation back down to 2% and inflation is a problem that refuses to back down.”
Read more: It's the OCR that matters for inflation targeting – RBNZ
Kerr said since the RBNZ last hiked interest rates in August, the risks to inflation were becoming more skewed to the upside and the currency was now to blame.
“In the last week, the weakness in the Kiwi dollar has become far more pronounced. Tradables and inflation is taking far longer to normalise,” he said.
“The RBNZ may be forced to signal even more policy tightening if needed. But next week’s MPR is only a small statement – with accompanying MPC meeting minutes – so doesn’t include an updated set of forecasts.”
Kerr said financial markets were crumbling under the weight of higher interest rates.
“The risk of a global recession has risen substantially and by central bank design,” he said.
“Traders have been quickly reminded that the Kiwi is a flightless bird when risk sentiment turns south.”
Read more: New Zealand avoids recession
Kerr said global financial markets were highly sensitive to central bank moves.
“Bears, not bulls, rule equity markets and bond markets have been savaged by rapidly rising interest rates,” he said.
“Wholesale interest rates here at home have been pulled along for the ride. The rapid increase in Kiwi wholesale rates is putting even more (upward) pressure on mortgage rates and business lending rates.”
Kerr said for now, Kiwibank continued to pick the peak in the cash rate at 4% in November.
“We believe the economic pain of such aggressive monetary tightening should be enough to tame the domestic inflation beast,” he said.
“The risk is clearly tilted to even more tightening, if the inflation beast refuses to retreat.”
