Moody's says 'soft landing' unlikely after official cash rate hiked to 3.5%

Wednesday, 5 October 2022

Credit ratings agency Moody’s says “a soft-landing” for the New Zealand economy is looking “increasingly unlikely” after the Reserve Bank raised the official cash rate by 50 basis points to 3.5% on Wednesday.

The rate hike is the sixth this year and its fifth consecutive 50bp rise and prompted National Party finance spokesperson Nicola Willis to warn that “homeowners are in for a pummelling”.

The rate rise comes amid a growing schism between economists who argue central banks need to keep aggressively raising interest rates to be sure of quickly conquering inflation, and those counselling more caution in light of the time lag involved in monetary policy and growing fears of a global recession.

The Reserve Bank of Australia surprised analysts on Tuesday by only raising its official cash rate by 25bp to 2.6%, with its governor, Philip Lowe, noting its cash rate had “increased substantially in a short period of time” and explaining it was assessing the outlook for inflation and economic growth.

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But New Zealand’s Reserve Bank said after its review of monetary policy on Wednesday that it remained appropriate to continue to tighten monetary conditions “at pace” to maintain price stability.

“Core consumer price inflation is too high and labour resources are scarce,” it said.

A recent decline in oil prices and an “easing in some supply-chain constraints” had seen headline inflation measures fall in some countries, it noted.

“However, core measures of inflation have risen and persist.”

While higher interest rates around the world suggested a “weaker growth outlook” for New Zealand’s trading partners, domestic spending had remained resilient in the face of slowing global growth and higher domestic interest rates, it said.

“Overall, spending continues to outstrip the capacity to supply goods and services, with a range of indicators continuing to highlight broad-based pricing pressures.”

The Reserve Bank said it remained “resolute” in achieving its monetary policy remit.

The bank’s monetary policy committee said the recent drop in the New Zealand dollar would help rebalance the country’s current account, which is currently strongly in deficit, but said it also posed “further upside risk to inflation over the forecast horizon”.

The committee set a seemingly hawkish tone by saying it had considered whether to increase the OCR by 75 basis points, instead of 50bp.

The bank made a similar comment after its August meeting, though Orr subsequently clarified it had also discussed the option of 25bp rise then.

Most economists expect the Reserve Bank to follow up with a further 50bp rate rise in November that would take the OCR to 4%.

But there is no clear consensus on how much higher the rate might go next year.

The yield on two-year government bonds firmed 11 basis points to 3.967% immediately after the announcement on Wednesday, before losing that gain, while the New Zealand dollar rose almost half a US cent to US57.73c before a partial retreat.

Willis said the five consecutive 50bp rate hikes were unprecedented.

She blamed the Government which she said had “completely failed to curb its spending in the wake of its Covid spend-up”.

Finance Minister Grant Robertson rejected National’s criticism of its spending record when commenting on the Crown accounts published by the Treasury on Wednesday, accusing National of “hypocrisy”.

Setting aside Covid spending, Government expenditure had remained fairly close to the long term average at about 30% of GDP, he said.

National had been “completely fine” previously spending similar amounts, he said.

“It is simply what governments do when there is a crisis.”

Westpac acting chief economist Michael Gordon noted the Reserve Bank’s statement repeated much of the language from its August monetary policy statement and did not discuss the likely extent of future interest rate rises.

ASB chief economist Nick Tuffley made similar observations but said that on balance the statement had “a firm undertone”.