Why the RBNZ has no regrets about raising rates


Reserve Bank of New Zealand Governor Adrian Orr’s clear message on Wednesday was one of resolve, or, to pursue the path of least regret. This is not about regrets in terms of asset prices, but about a failure to contain inflation by not acting quickly and aggressively enough.

The RBNZ raised the cash rate by 50 basis points to 2%. The amount of the hike was no shock, but the dramatic increase in its peak cash rate forecast was; it now expects it to be 3.9% by February next year, up from 2.8%.

The RBNZ wants to go harder and faster to fight inflation, although there are undoubtedly challenges ahead for the highly indebted housing market.

Why is the RBNZ so jaded about blowing up the real estate market? Looks like the market can handle a fair amount of stress.

New Zealand has a historically low unemployment rate, which means that households have income to fund their loans. Households are also in good financial shape after years of strong asset price appreciation and windfall savings from the pandemic that have yet to be spent.

All of this applies in Australia, as the RBA often reminds us when citing how far households are ahead of their mortgage payments.

The reaction of the New Zealand housing market and its consumers to a sharp rise in interest rates will no doubt be instructive and instructive for Australia, as other policy measures such as macroprudential measures have been by the past.

That’s not to say there won’t be enough stress for central banks to change course and become dovish.

But it’s worth keeping an open mind about what pain central banks are willing to bear for us and what we’ll have to tolerate to defeat inflation.


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