21st Century Business Herald reporter Hu Huiyin reported that after many rounds of economic stimulus measures, New Zealand's inflation level seems to be getting out of control.
On January 27, statistics from Statistics New Zealand showed that CPI rose 5.9% year-on-year in the fourth quarter of 2021, up from 4.9% in the previous quarter and also higher than expected 5.7%. Inflation in New Zealand is now both above the global headline rate of 4.3% and the largest growth rate in 31 years.
It's hard not to worry about the Current Bank of New Zealand. Therefore, it is predicted that the Bank of New Zealand will actively raise interest rates in the first half of the year. If the market expects, the RBNZ announced a rate hike at its Feb. 23 meeting, which would be its third increase in its official cash rate in five months.
"At present, a major factor driving up inflation in New Zealand is imported inflation, including oil prices, soaring commodity prices, etc.," Liao Qun, chief economist of the Chongyang Institute of Finance at Chinese University and chief expert of the Global Governance Research Center, said in an interview with the 21st Century Business Herald reporter.
When the world's major economies invariably control inflation by raising interest rates, they are likely to face side effects. In this regard, Wang Xinjie, chief investment strategist of Standard Chartered China Wealth Management Department, told the 21st Century Business Herald that the side effects of New Zealand's interest rate hikes will act on economic activities, the most obvious of which is in the process of normalization of economic growth in the post-epidemic era, which is easy to cause stagflation risks.
What exactly is New Zealand facing, which is about to enter the third rate hike cycle?
High inflation affects life
Although New Zealand is at the forefront of the global rate hike economies, the results of its first two rate hikes do not seem to have been as effective as expected, judging from the current new highs in inflation. Under the high inflation, the first thing that must be reflected is the consumption bill of the New Zealand people.
According to Statistics New Zealand, new home prices are now up 16% compared to 2020, rents are up 3.8% overall and fuel prices are soaring by 30%. In response, Jon Duffy, chief executive of Consumer New Zealand (Consumer NZ), also said he did hear a lot about price increases in three main areas, with gasoline being the biggest one, followed by food and then rents, which is a huge problem for many.
Rising oil prices, rents and food prices have not affected the lives of New Zealanders. Worse still, people's wage increases are far from keeping up with inflation.
Statistics New Zealand's latest figures show that 42 per cent of New Zealanders did not get a raise last year, and even if they did, it was below inflation. In response, Craig Renney, chief economist of the New Zealand Council of Trade Unions, also said that raising the minimum wage is necessary because the most vulnerable people will be hit the hardest.
Inflation in New Zealand remains high, and in the view of Sean Langcake, chief economist at BIS Oxford Economics, it is a combination of international and domestic factors.
"Globally, fuel prices rose quarterly in December, and this momentum will continue into early 2022. In addition, the local construction sector has also contributed to inflation. Strong demand, combined with labor and material shortages, has led to a sharp rise in the cost of building new homes. Sean Langcake told the 21st Century Business Herald that the labor shortage has also pushed up food prices.
It is reported that New Zealand's labor shortage stems from measures to close the country's borders during the epidemic period. New Zealand is heavily dependent on migrant labour, and the closure of the country has led to higher local production costs and lower production of products. Until now, New Zealand has not opened its borders, and the problem of labor constraints will continue.
Speaking of the impact of the epidemic, Liao Qun pointed out to reporters that the loose monetary policy implemented in New Zealand will inevitably push up the level of inflation.
After multiple rate hikes, is New Zealand likely to face stagflation?
With New Zealand's domestic inflation at record highs, it is predicted that the Central Bank of New Zealand is likely to announce a rate hike at its central bank meeting on February 23.
Sean Langcake, chief economist at Oxford Economics, predicted to 21st Century Business Herald that based on the latest inflation data, new Zealand is likely to raise interest rates in February. At the same time, Sean Langcake believes that New Zealand's interest rate hikes are more focused on the domestic inflation and wage growth prospects, largely independent of the Fed's intention to raise interest rates.
In this regard, Wang Xinjie also pointed out to reporters that the key work of various countries has now fallen on controlling inflation, and New Zealand will not be an exception. "In addition to two consecutive months of interest rate hikes in October and November last year, New Zealand will further tighten monetary policy in the future." He said that from the interest rate implied by OIS in New Zealand, by the July 2023 interest rate meeting, the Fed will raise interest rates more than 5 times, each time by 25 basis points, and the policy rate will exceed 2%.
TONY Sycamore, a senior analyst at Forex, shares a similar view. He argues that inflation is now nearly twice the top of the RBNZ's target range and that there is little way to stop the country's central bank from raising the cash rate to 2.5% by mid-2023.
The hike is already on the string. Prior to this, in order to alleviate inflationary pressures to a certain extent, the New Zealand government took the lead in targeting the oil prices that most affected the New Zealand people.
In January this year, the New Zealand government introduced the Fuel Industry Amendment Ordinance, announcing that from February 11, energy service stations will publish standard prices for all fuel grades on roadside price boards, allowing motorists to shop around and understand the prices offered by different fuel retailers. What's more, the regulations require fuel companies to report their costs, prices and sales to the Commerce Commission starting this year.
Commerce Commission Chair Anna Rawlings said the provision would help the European Commission monitor the competitive performance of the fuel market, including whether fuel companies are making excessive profits at the expense of consumers.
The New Zealand government has indeed become aggressive in curbing oil prices, but the move has not been favored. "The rise in international oil prices is mainly due to the impact of supply and demand and the limitations of short-term geopolitical crises. Demand now outweighs supply and is not expected to reverse in the short term. Wang Xinjie analyzed to reporters.
In this light, new Zealand can only hope to tighten monetary policy if it wants to control inflation and restore economic activity to normal levels. However, the current recurrent epidemic in New Zealand has also become an obstacle to the government's tightening of monetary policy.
Wang Xinjie analyzed to reporters that if the epidemic in New Zealand is repeated, it will lead to a sharp contraction in economic activity, when the first will be the rise in loan interest rates, thereby affecting consumer spending, "In a larger dimension, the repeated epidemic will limit economic activities, or will continue to exert pressure on the supply side, inflation will still be high, while superimposed on monetary policy tightening, may cause stagflation." ”
In this regard, Liao Qun also analyzed that stagflation in New Zealand is very likely. He pointed out that although New Zealand's economy has recovered in 2020, it is not easy to return to pre-epidemic levels, and with the prospect of multiple interest rate hikes now, it is estimated that its growth prospects will be lower than everyone expected.
Therefore, Liao Qun is not optimistic about New Zealand's growth prospects. "If you look at the three years from 2020, New Zealand's economy will tend to grow at a low level or even zero." He predicted to reporters.
For more information, please download the 21 Finance APP