PM warns of tough times ahead as Reserve Bank expected to increase official cash rate

National Party leader Christopher Luxon sits down with Stuff political editor Luke Malpass at 8:40am to discuss interest rates and Maureen Pugh’s climate change U-turn. You can watch this in the live stream above.

Cyclone Gabrielle is expected to make inflation worse, increasing the costs of food and construction as the Reserve Bank stands ready to hike interest rates again.

Reserve Bank Governor Adrian Orr will deliver the first monetary policy statement of the year on Wednesday afternoon, where economists expect he will increase the official cash rate by 50 basis points to 4.75%.

Higher interest rates are expected to follow in ongoing efforts to tame roaring inflation.

It is another severe blow, as much of the North Island makes the first steps on the long road to recovery in the aftermath of Cyclone Gabrielle.

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The storm has caused serious damage to housing, productive land, businesses and infrastructure.

Chris Hipkins focused his first speech as prime minister in the House on Tuesday on the floods, warning of tough times ahead for the whole country.

The affected areas – Northland, Auckland, Waikato, Coromandel, the Bay of Plenty, Tararua, Tairāwhiti, and the Hawke’s Bay – account for 30% of New Zealand’s land mass.

They are home to more than half of the population and produce about half of the nation’s GDP.

“We don’t yet have a complete assessment of what the cost of that is going to be, but we know it will be significant–a multi-billion dollar price tag is ahead of us.

“And there is no point in sugar-coating it; we know that there are some tough times ahead for the whole country as we work our way through that,” he said.

Mark Smith, a senior ASB economist, is amongst commentators predicting a 50-basis point rise on Wednesday, and further hikes in the future.

He predicted short-term pain for some, such as those with larger mortgages or who had just got into the housing market, as a result of higher interest rates.

Meanwhile, the rebuild after the cyclone will be inflationary, meaning the higher demand for goods and services will be even more outstripped by supply and further drive up prices, he said.

It will add more pressure to an already constrained economy, particularly in the construction sector.

“It is the sort of shock that will leave New Zealand worse off as a result,” he said.

It was a “difficult situation” for all involved, he added, but failing to address inflation now would create a bigger problem in the future.

“We need to do what we can to make sure people overall will be better off,” he said.

“By not raising the official cash rate, inflation will run away faster and become more costly.”