For New Zealand, having the most hawkish central bank in Asia doesn’t go far enough. Officials are intensifying their battle against inflation, even as confidence ebbs and the vital housing industry teeters. Is the country racing toward a recession?
The Reserve Bank of New Zealand raised its benchmark interest rate by a half a percentage point on Wednesday to 1.5%, a larger increase than forecast by most economists. That is the first 50 basis point step in almost a generation, pushing the Kiwi dollar higher and bond yields lower. The bank acknowledged signs of a slowdown, but said inflation is too high for comfort. The goal is to quickly return borrowing costs to neutral, an ambiguous zone that neither stimulates nor hampers the economy. “A more neutral stance sooner will reduce the risks of rising inflation expectations,” the RBNZ said in a statement.
Getting to such a hallowed place may allow the authority to pause and scrutinize the effects of a relatively rapid tightening. Many central banks are pushing rates higher: Federal Reserve officials signaled they are contemplating a half-point move, the Bank of Canada may become more aggressive, while additional strikes against inflation are expected in Singapore and South Korea. New Zealand started the scramble for higher rates earlier than most and Wednesday’s move was the fourth at consecutive policy meetings. The RBNZ’s language echoed that of Richmond Fed President Thomas Barkin, who hours earlier talked about the advantages removing pandemic-era accommodation with alacrity. “The best short-term path for us is to move rapidly to the neutral range and then test whether pandemic-era inflation pressures are easing, and how persistent inflation has become,” Barkin said at an event in New York. If someone in Wellington was taking notes, I hope they scribbled in the margin that the Fed has barely started a series of hikes. The RBNZ is further along.
A more muscular approach is understandable. New Zealand was the first country to adopt a formal inflation target, and New Zealanders are quick to remind people of that achievement. The country tends to be fast to ratchet up rates doing a recovery, and then sometimes undo that work almost as quickly when growth slows. Consumer prices rose 5.9% in the fourth quarter of 2021 from a year earlier, miles from the 1% to 3% target. The unemployment rate is a record low 3.2%. The economy looks pretty hot from that perspective.
Take a second look and some cracks are appearing. Consumer and business confidence has been hit, in part because of rising interest rates, but also reflecting the spread of omicron. Higher energy costs and Russia’s invasion of Ukraine aren’t helping. The real-estate sector is sagging: Home prices are falling and some economists predict they will sink as much as 10% this year. That’s bad news for growth, generally. “All told, nearly a quarter of New Zealand’s economy directly hinges on the housing market,” Ben Udy at Capital Economics wrote in a note last week. “Once the housing market starts to slump in earnest, the repercussions for the wider economy could be severe.” He expects rate cuts next year.
Just as critical will be the prognosis for the major economies. Recession is increasingly discussed as the price for the Fed quelling inflation, one measure of which accelerated to 8.5% last month. Fears of a renewed slump surged in the investment community, according to a Bank of America Corp. fund manager survey released Tuesday. “The combination of overheating, followed by policy delay, followed by supply shocks means I think it’s a very difficult set of challenges, and recession in the next couple of years is clearly more likely than not,” Former Treasury Secretary Lawrence Summers told Bloomberg Television on Friday.
There’s not a huge advantage to moving before the Fed only to get caught in its downdraft. New Zealand’s enthusiasm may come at a price.More From Bloomberg Opinion:The Fed Has Made a U.S. Recession Inevitable: Bill DudleyThe Yen’s Plunge Is a Dilemma of Japan’s Own Making: Daniel MossKnow a Good Inflation Hedge? Tell Me, Please: Matthew Brooker
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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