Inflation and rising interest rates remain key headwinds for the economy - Quarterly Predictions, December 2022

November 29, 2022

New Zealand Institute of Economic Research (Inc)
Media Release, 29 November 2022

For immediate release

Inflation pressures remain intense in the New Zealand economy, over a year from when the Reserve Bank of New Zealand first started raising the Official Cash Rate (OCR) in this cycle. Households and businesses face a perfect storm of high inflation and rising interest rates as central banks around the world tighten monetary policy to dampen demand to bring inflation back towards their target bands. These pressures will weigh on the economic recovery over the coming years.

Principal Economist Christina Leung says, "Central banks globally have lifted interest rates at a rapid pace in response to the widespread surge in inflation. However, resilient demand and continued capacity pressures are keeping costs high in the New Zealand economy".

Demand is still resilient over a year on from when OCR started to lift

The impact of higher interest rates has been more immediate and timely on the housing market, but the New Zealand economy remains resilient overall. As businesses pass on higher costs by raising prices, this is underpinning continued high inflation.

"Although higher interest rates have reduced the ability of households to borrow, a substantial proportion of mortgages are due for repricing over the coming year. As these households roll off historically low fixed mortgage rates onto significantly higher rates, the impact of higher interest rates will become more apparent as households adjust their spending in the face of higher mortgage repayments."

"That is largely a story for later in 2023, but for now, households still show a willingness to spend. Although consumer confidence has softened, retail spending is holding up."

RBNZ resolute in stamping out inflation

"This lagged nature of when higher interest rates start to materially impact households and the broader economy heightens the risk of the Reserve Bank over-correcting when conducting monetary policy. In its November Monetary Policy Statement, the central bank showed it is resolute in bringing inflation back towards its 2 percent inflation target mid-point. The Reserve Bank expects to undertake further substantial monetary policy tightening in order to dampen demand to rein in inflation. We expect the negative impact of higher interest rates on demand will become more apparent around mid-2023, such that the Reserve Bank will not need to increase interest rates by as much as it currently expects to. Nonetheless, we expect further increases in the OCR and for it to peak at 5 percent over the coming year."

Quarterly Predictions is an independent review of New Zealand's economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER's members.

For further information, please contact:
Christina Leung, Principal Economist & Head of Membership Services, 021 992 985