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New Zealand’s central bank was among the first to start hiking interest rates to unwind pandemic stimulus that stoked inflation, and it’s also reached the peak ahead of many of its peers. But unlike many countries, the impact of its unprecedented hiking will continue to hurt for some time.
Similar to other countries, New Zealand’s Reserve Bank Te Pūtea Matua and the Government moved to support the economy and boost spending to counter the massive disruption from the pandemic which closed international borders and saw people contained to their homes through lockdowns.
Most central banks around the world reduced rates to record lows in a bid to prop up their pandemic-hit economies and New Zealand was one of the first developed economies to then reverse those cuts and push interest rates higher.
At the start of the pandemic, the official cash rate was cut to a record low 0.25% in March 2020 and stayed there for 18 months until October 2021 when the central bank started to raise borrowing costs to wind back the stimulus, lifting the rate by 25 basis points to 0.5%.
New Zealand had been on track in August 2021 to become the first developed country to hike interest rates following the pandemic. But at the last moment, the bank chose to stay on hold after then-Prime Minister Jacinda Ardern imposed a nationwide lockdown as the country faced the first community transmission of the Delta variant.
That led to South Korea taking up the mantle, hiking its base rate by 25bp from a record low of 0.5% to 0.75% in August 2021 – although emerging economies like Sri Lanka had raised interest rates even earlier. Norway was the first major Western central bank to raise interest rates, taking its benchmark from zero to 0.25% in September 2021.
“Central banks were pulling out all the stops, slashing interest rates, printing money, and doing whatever they could to ensure they were stimulating demand at a time when we thought we were all falling into recession,” says Kiwibank chief economist Jarrod Kerr.
“In hindsight, both governments and central banks stimulated too much and we’re now dealing with higher inflation as a result.”
Reserve Bank deputy governor Christian Hawkesby sits down with Stuff senior business reporter Tom Pullar-Strecker to chat about the economy.
Kerr says New Zealand’s central bank was not only one of the first to start unwinding stimulus, but also one of the most aggressive.
The Reserve Bank embarked on its fastest pace of tightening since pioneering inflation targeting more than 30 years ago, increasing the rate by 525 basis points to 5.5%, its highest level since 2008, as it tried to pull back inflation.
In comparison, Australia’s Reserve Bank didn’t start its hiking cycle until nine months later in May 2022 when it lifted its rate 25bp to 0.35%. Australia’s latest hike in June took the rate to a 10-year high of 4.1%, and governor Philip Lowe has hinted strongly it will push them up again, saying “further tightening” might be required.
Kerr says while New Zealand’s Reserve Bank believes its interest rates have peaked, other central banks like the Reserve Bank of Australia, the US Federal Reserve, the Bank of England and the European Central Bank still have work to do.
“Over the next three to four months, I’d say all of these central banks will have found the peak in their cash rates,” he says.
However unlike Australia where variable interest rates are common, most New Zealand mortgages are on fixed terms, which means it takes time for changes in the official cash rate to flow through to households.
Kerr says the lag between the central bank changing interest rates to when the impact flows through to households is “a big frustration” for the Reserve Bank.
“They’ve lifted the cash rate quite dramatically in the last year and a half and it’s still feeding through,” he notes.
Kerr says only half of Kiwibank’s mortgages have rolled off lower interest rates on to higher rates, with the other half yet to be impacted – about 40% will roll off their current low rates over spring and summer.
A lot of people with an $800,000 mortgage who were paying $20,000 in interest will end up paying more than $50,000 in interest at a time when declining house prices have hit confidence, he says. And that’s on top of the extra money that’s already been sucked out of households from higher living costs.
“That’s where household budgets come under stress,” he says.
“We’re spending more money and we’re getting less. And then on top of that if you’ve got a mortgage or any debt, you’re paying a lot more for it, so that’s really a big double whammy on households at the moment.”
Kiwibank believes weakness in household spending and the reluctance of businesses to expand has pushed the country into a recession that will last for the rest of the year.
“Growth is slowing and it’s likely to contract this year – 525 basis points of rate hikes in a very short space of time is having the impact that the Reserve Bank wanted. I think, if anything, that the risk is that they’ve done a little too much,” Kerr says.
In its latest Global Economic Prospects report, published in June, the World Bank predicted slow growth this year and cut its forecast for next year.
The World Bank predicted global gross domestic product would rise 2.3% this year, higher than its January forecast of 1.7% but below last year’s 3.1% pace. It lowered its estimate for growth next year to 2.4% from 2.7%.
Kiwibank’s Kerr says the prospect of weaker demand from overseas markets doesn’t bode well for a small, open economy like New Zealand.
“In this environment, commodity prices are more likely to fall further than bounce back materially, so that will put a dampener on our exports,” he says.
“That’s hitting us now. We’re expecting a mild recession in New Zealand, as we will see in large parts of the world.
“They’re basically saying their expectations are for much weaker growth, recessions in parts, and that weaker growth isn’t just for the next six to nine months, it’s all over 2024 as well.”
Kerr expects the debate will swiftly start to turn from rate hikes to rate cuts.
“That will be the story that will dominate over the remainder of this year and pick up pace in 2024,” he says.
“Just as we were the first to start hiking, we might also be the first to start cutting.”
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