RBNZ ready to lift the cash rate above 4% to combat inflation

The interest rate will peak by mid-2023 as the Reserve Bank of New Zealand (RBNZ) forecasts. There is a high risk of it increasing to 4.25% in the near future.

“We cannot present unambiguous estimates over the level of interest rate hike,” stated RBNZ Deputy Governor, Christian Hawksby. “The rate could reach 4.25%, or move around that range.”

This is due to the need for economic slowdown, along with a price pressure reduction. Last week, the interest rate hike by 50 basis points (up to 3%) was recorded. The Reserve Bank also announced the expediency of a further rate increase, despite the optimal level range claimed at  2-3%.

According to Hawksby, New Zealand's economy turned out to be more stable than expected. Consumption and demand in the domestic market continue to be relatively so, regardless of public confidence surveys.

“There is no doubt the implementation of monetary policy takes time,” said the RBNZ Deputy Governor. He noted “a majority of homeowners fall short to refinance their mortgages over the next 12 months” as interest rates rise. That will also be reflected in the construction industry, as well as consumer spending.

Next year, the level of employment is likely to decrease, but economic recession will be avoided. Inflation is expected to reach 3.8% by the end of 2023. To compare, today’s inflation rate is estimated at 7.3%.

“We’re projecting economic growth to slow down, but it will be a good starting point for the labor market,” Hawksby claimed. Thus, reducing inflation with a sustainable employment level is anticipated.

Last week’s 50 basis point increase in interest rates became the fourth consecutive hike. Most economists expect another rate rise (reaching 3.5%) at the next meeting in October.

Experts differ among themselves in estimating a new hike. Based on swap prices, there is a 50% chance of a rate increase to 4% this year.

Economists and investors have one thing in common: interest rates are not expected to rise to 4.25% in the following cycle.

As Hawksby estimated, the Reserve Bank of New Zealand is already close to slowing down the pace of hikes.