Daily Commentary BY THE CURVE TEAM –

New Zealand Low Rates Under Pressure

18th of May, 2021

A surging economy in New Zealand prompts expectations of rate hikes.

This adds to expectations of earlier tightening than central banks expect. Already Canada have reduced their QE programme in the face of a booming economy.

In the US, a spike in inflation recently has spurred talk of tightening policy. New Zealand for some time have been ahead of the developed world, with house prices running very hot and macro-prudential reforms already implemented.

In fact, the Reserve Bank of New Zealand are now considering house prices in their policy decisions. Now more traditional central bank metrics are starting to align for the Reserve Bank to increase interest rates.

Unemployment in New Zealand is 4.7% and shows signs of imminent further improvement. Inflation also has spiked but appears not to be transitory.

Both input prices from supply constraints and end prices to consumers are on the rise, and the increases are broad based. This is in contrast to what most central banks outside of New Zealand expect, which is that inflation will be transitory and there remains spare capacity in the economy which needs to be filled before inflation rises.

Perhaps the difference in New Zealand is that with such a low unemployment rate and the output gap diminished, they are starting to push up against full employment, hence the translation to price growth. An interesting thing accompanying this is the feedback that a lack of labour supply is also causing inflationary pressures earlier than expected.

This is similar to recent updates in the US, where extremely high job vacancies was not matched by a simultaneous increase in jobs. It was speculated this was due to a lack of adequate supply.

It is plausible other countries could follow New Zealand. If production does not respond quickly to supply constraints and increased demand, as economies push up against full employment then inflationary pressures could prompt central bank action.

Josh Stewart

Associate - Money Markets