IMF sounds alarm over inflation as ANZ tips 4.5% may not be a peak in NZ

Wednesday, 13 October 2021

Slower growth and rising inflation may give central banks little room to manoeuvre.

An alarm bell over global inflation has been sounded by the International Monetary Fund, which is also warning that the momentum behind the recovery of the world economy has weakened.

ANZ separately forecast that annual inflation would reach 4.5 per cent in New Zealand when Stats NZ publishes figures for the September quarter on Monday, and could take longer than it had previously expected to come down.

In the latest release of a twice-yearly report on the outlook for the world economy, the IMF said health risks were holding back a full return to normality, with Delta outbreaks in “critical links of global supply chains” further feeding inflation.

The IMF slightly downgraded its growth forecast for the world economy this year from 6 per cent to 5.9 per cent and its chief economist Gita Gopinath said that, overall, risks to economic prospects had increased.

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IMF chief economist Gita Gopinath says risks are rising.

She warned that the outlook for low-income, developing countries had “darkened considerably due to worsening pandemic dynamics”.

Only about 4 per cent of people in those countries had been vaccinated against Covid, but the pandemic would not be over anywhere until it was over everywhere, she said.

It is the report’s comments on inflation that appear to have garnered the most attention.

Monetary policy would need to “walk a fine line between tackling inflation and financial risks and supporting the economic recovery”, Gopinath said.

“While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery,” she said.

Central banks should announce “clear triggers” and act in line with that communication, she added.

The Reserve Bank of New Zealand is charged with keeping inflation within the band of 1 to 3 per cent over the medium term.

But the bank has tended to define the “medium-term” as 18 months to three years out, allowing it to turn a blind eye to inflation above 3 per cent if it assesses that is likely to be temporary.

ANZ is forecasting inflation will drop, but not as quickly as it previously thought.

“As we head into the Christmas rush, pressure on already-stretched supply chains means we may not see inflation peak until the New Year – a bit later than we previously thought,” the country’s largest bank said in its latest update.

The balance of risks was “actually looking pretty uncomfortable”, ANZ said.

“With lockdown dragging on, downside risks to employment and growth must inevitably be building, for all that investment and employment intentions have so far proven resilient.

“At the same time, inflation risks are very much to the upside.”