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Healthcare

POLL-RBNZ to hike rates for first time in 7 years to cool blazing economy

* here poll data

BENGALURU, Oct 1 (Reuters) - New Zealand’s central bank, faced with above-target inflation and an economy about to overheat, will raise rates for the first time in seven years on Wednesday after an outbreak of COVID-19 stopped it from doing so in August, a Reuters poll found.

Large amounts of stimulus and a small COVID-19 caseload has helped the economy recover strongly and pushed inflation to its highest in a decade, suggesting the central bank needs to act to prevent it from rising further.

All 20 economists in a Sept. 27-30 Reuters poll were unanimous in predicting the Reserve Bank of New Zealand (RBNZ) would raise the official cash rate by 25 basis points from a record low to 0.50% at its Oct. 6 policy meeting.

Markets are fully pricing in a 25 basis point rise too, after a handful of new COVID-19 cases sparked another lockdown in August and wrongfooted traders who had expected a hike to come then.

If the RBNZ delivers, it would put New Zealand ahead of most other developed economy central banks in the current global tightening cycle.

“A red-hot economy, tight labour market, rising consumer prices, and eye-popping house price growth: when the stars align like this, a rate hike is imminent,” said Jeremy Couchman, senior economist at Kiwibank.

“The RBNZ has already called time on its bond-buying programme (and) the next move should have been a rate hike in August, but cue the Delta outbreak. We expect the RBNZ to follow through in October, with three hikes to 1% by February 2022.”

The sizzling housing market, where prices have nearly doubled in the last seven years and soared nearly 26% year-on-year in August thanks to super-low interest rates, is also on the central bank’s radar.

More interest rate rises are on the way, with the benchmark rate expected to reach 1.50% by the end of next year and 1.75% by the end of 2023, the poll showed.

Still, that is half what it was in 2014 after the RBNZ last tightened its monetary policy with four consecutive quarter-point rate hikes to quell inflation pressures.

The poll showed inflation would remain above the central bank’s mid-point target of 2.0% for years to come. It is expected to rise to 2.9% this year, slip to 2.5% next year but still be running at 2.2% in 2023.

All respondents to an additional question said the risks to their inflation forecasts were skewed more to the upside.

“In terms of how worried the Bank might be that it could fail to meet its mandate, it should be very worried,” said Stephen Toplis, head of research at Bank of New Zealand.

“It’s already got inflation well above target and likely to stay at a level that does not demand the current ongoing level of stimulus.”

New Zealand has enjoyed rapid economic recovery since a recession last year, partly because it eliminated coronavirus within its borders and reopened its economy before others.

The country had been virus-free for around six months until an outbreak of the highly infectious Delta strain in August put the country into a snap COVID-19 lockdown.

Economists predicted the economy contracted 7.0% on a quarter-on-quarter basis last quarter due to the lockdown, but expected it to rebound strongly with 7.9% growth this quarter as vaccinations increase and the outbreak is contained.

“Looking through lockdown volatility, things feel very late-cycle, with the COVID policy response having exacerbated structural risks around debt, both in New Zealand and globally,” said Sharon Zollner, chief economist at ANZ.

“Interest rates need to rise to re-align risk appetite and asset prices to something more sustainable, but the risk of a hard landing is real.”

For other stories from the Reuters global economic poll Reporting by Vivek Mishra; Polling by Devayani Sathyan and Md. Manzer Hussain; Editing by Ross Finley and Alex Richardson

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