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New Zealand is set to raise interest rates this week, the first advanced economy in the Asia-Pacific to begin normalising policy, as a powerful recovery unhindered by Delta outbreaks shows signs of overheating.
The Reserve Bank of New Zealand will lift the official cash rate by a quarter percentage point to 0.5 per cent at its review Wednesday in Wellington, according to 13 of 17 analysts surveyed by Bloomberg. One economist predicts a half-point increase and three see no change. Markets also expect a hike as concerns mount that labour shortages will unleash wage-push inflation.
New Zealand Prime Minister Jacinda Ardern. The country’s economy is at risk of overheating.Credit:Getty
“It is clear the New Zealand economy no longer requires extreme monetary stimulus,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “Signs of overheating are evident across the board, and the risks of a boom-bust cycle are high and rising.”
Governor Adrian Orr unexpectedly ended quantitative easing in July, a sign that the RBNZ was already concerned about the potential for overheating from its stimulus settings. Since then unemployment has tumbled to 4 per cent and private wage gains have surged to a 13-year high.
New Zealand is set to be first to move in the region, ahead of the Bank of Korea, which has flagged its commitment to normalise policy in the coming months. The BOK meets next week, with a possible rate rise on the agenda.
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The RBNZ Monetary Policy Committee, chaired by Orr, releases its decision at 2pm in Wellington. The central bank will also publish a quarterly monetary policy statement, including new forecasts, and Orr will hold a press conference at 3 pm
Most economists expect Wednesday’s move to be the first in a series of rate hikes. Investors agree, fully pricing in a quarter-point increase this week and a 70 per cent likelihood of the OCR reaching 1 per cent by year’s end.
Higher borrowing costs would potentially ease pressure on policy makers to rein in house prices, which soared 31 per cent in the year through July. The RBNZ doesn’t target the property market, but it is required to assess the effect of its decisions on the government’s policy to support more sustainable house prices.