NZ in a worse inflation position than other countries: Infometrics
Thursday, 13 April 2023
New Zealand is under more continued inflation pressure than many other countries, one economist says, and there is little evidence that is starting to ease.
Infometrics has released its latest economic forecasts, which predict inflation will still be at 6.6% by the end of this year and 3.8% by the end of next year.
The Reserve Bank targets a 1% to 3% range but Infometrics said it might not get inflation back to that level until mid-2025.
Chief forecaster Gareth Kiernan said the after-effects of Cyclone Gabrielle were showing up in produce prices, and rents and building costs were also likely to be pushed up in areas that were affected by the weather events.
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“Although the Reserve Bank can do little about these immediate pressures, they come at a time when pricing behaviour and inflation expectations have already been sustained at a high level for longer than expected,” he said.
“Domestic transport costs remain problematic for businesses and upward pressure on labour costs is still significant.”
He said consumer spending would be squeezed into next year as households came off lower fixed mortgages and on to higher interest rates.
Kiernan said inflation pressure was reducing internationally, but New Zealand seemed to be in a worse position than some other countries.
“It’s still mixed – you get good bits of data, you get bad bits of data. The problem in New Zealand is that we’re just not getting any of the real good bits through here so our problem still seems to be more acute than what you’ve got overseas. Pressure from overseas may be abating, but it’s not coming through here to the same extent, unfortunately.”
He said it would take nine to 18 months for the effect of the Reserve Bank’s actions to fully impact the economy.
“I wouldn’t want to downplay that point too much or suggest that we have to keep going until inflation is basically dead before we stop raising rates. [But] it looks like we are still needing a circuit breaker to change people’s inflation expectations, price-setting behaviour and wiliness to pass on costs.”
He said businesses were still reporting concerns about things such as domestic freight costs and labour costs. Cost pressures were spreading into areas that had not been seen before, he said.
Kiernan said the tone of the recent monetary policy review indicated that the official cash rate would increase to 5.75% in the next few months.
A decrease in interest rates from mid-2024 was likely to be slower than the pace of increases had been.
“The average interest rate being paid across all mortgage debt could remain higher than current levels throughout the next five years.”
He said one area where there were signs of relief in the economy was in worker shortages. Work visa approval numbers had increased and more people were coming into the country.
This, at the same time as monetary conditions were tightening, would help to push the unemployment rate to almost 5% by the middle of next year.
He said Infometrics expected gross domestic product growth to average 0.8% a year through 2024 and 2025.
“Even with infrastructure repairs following Cyclone Gabrielle providing a limited boost to growth, sluggish exports and household spending will weigh on the economy for several quarters,” Kiernan said.
“But unlike some other forecasters, we do not believe the Reserve Bank is overdoing the slowdown. Insipid growth is needed to correct the imbalances that have manifested themselves across a wide range of indicators, from the housing market, to the current account deficit, and inflation outcomes.”
Kiernan said the forecast showed the growth was slowing but inflation was still a problem and growth was not slowing as fast or as much as it should.