October 12, 2021
  • October 12, 2021

New Zealand central bank raises interest rates

By on October 6, 2021 0

WELLINGTON, New Zealand — The New Zealand central bank has raised interest rates to a record high and signaled further increases over the next year as it seeks to control inflation and curb the surge in house prices.

By raising its key rate from 0.25% to 0.5%, the Reserve Bank of New Zealand has joined with the central banks of South Korea and Norway in tightening monetary policy. Interest rates in the more volatile emerging economies, from Brazil to Turkey, have also risen in response to inflationary pressures that have worsened as supply chains degrade and shipping prices skyrocket. .

New Zealand, with a population of around five million, balances short-term shocks to its economy from restrictions introduced in the country’s largest city, Auckland, in mid-August to curb a Covid outbreak -19 with price pressure that could derail its recovery if left unchecked.

Inflation expectations are now above the upper end of the Reserve Bank of New Zealand’s 1.0% to 3.0% target range, as global shipping disruptions and rising prices for commodities this year have impacted the prices of everyday consumer goods. On Tuesday, the global benchmark price for Brent crude oil hit its highest level since October 2018, while copper set a record earlier this year.

New Zealand’s unemployment rate fell to 4.0% in the three months to June, largely thanks to the closure of its border with most of the world at the start of the pandemic. Employers from agriculture to construction and engineering contractors are struggling to find enough workers, with many raising wages to get the workforce they need.

The main objectives of the Reserve Bank of New Zealand are to achieve 2% annual inflation over the medium term and full employment. However, the country’s government asked it earlier this year to factor house prices into monetary policy decisions.

This has become more of an issue after New Zealand’s response to the pandemic sparked a local housing boom.

In March last year, the Reserve Bank of New Zealand cut its policy rate three-quarters of a percent to 0.25% as it sought to support activity. In doing so, it made new home loans more attractive to homeowners and speculators. Median house prices in New Zealand have increased by around 30% in the past year, among the fastest in the Organization for Economic Co-operation and Development.

New Zealand’s central bank has sought to cool the housing market with credit restrictions, while the government has cut tax breaks for homeowners, but house prices have continued to rise. It’s a problem facing other countries where a record increase in home values ​​during the pandemic sparks new debates over housing affordability. Australia’s financial regulator on Wednesday raised the minimum interest rate cushion it expects lenders to use to assess the ability of new borrowers to repay their home loans.

The rhetoric of the Reserve Bank of New Zealand generally downplays the role of housing in its monetary policy decisions, although it may be appropriate to include it at this time as inflation, employment and house prices go up. all in the same direction, said Gareth Kiernan, chief forecaster at Infometrics, an economic consulting firm.

“It will be handy for the bank to also include all the housing market arguments in the rationale for their tightening, to help deflect any political criticism that might otherwise come their way for not doing enough to slow the housing market down. housing, ”he said.

The central bank forecast in August that the cash rate would reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, although some economists doubt it will exceed 1.5%. He is not expected to publish new projections until the end of November.

Write to Stephen Wright at [email protected]

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