Inflation pandemic, more interest rate booster shots

  • Just as NZ is getting to grips with the likelihood that COVID will eventually be part of everyday life (i.e. become endemic), NZ is also dealing with the growing risk that inflation moves from being a pandemic to becoming endemic – entrenched in the economy like it was back in the 1970s and 1980s
  • We now think the RBNZ will need to push the OCR up to 2.75% by early 2023 – that is three 25bp booster shots more than in our previous view
  • We stress this is our best guess of where interest rates will track.  If there is anything we have all learnt from the past two years, it is that outlooks can change very quickly
If there is anything we have all learnt from the past two years, it is that outlooks can change very quickly.  If all goes swimmingly well, a booming economy undented by any more shocks may need even higher interest rates than what we now forecast to keep growing demand in check with what we (and the rest of the world) can supply at a sustainable cost.  Conversely, further economic disruption that causes wallets to get lost down the side of the couch, or marked sensitivity to rising interest rates, could easily see the OCR peak at a lower level.  Whatever the peak, the key point is that short-term interest rates look like they have a lot further to rise, and people need to be mindful of how that will impact on their financial position over the next few years.  The door is slamming shut on the run of incredibly low interest rates.

Inflation expectations out this week will understandably be under the spotlight.  In highlighting how people perceive inflation will track, they give a gauge of people’s preparedness to accept rising prices or to try lifting prices.  Perception can bring about reality, which is what the RBNZ will be watching out for.

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Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.