Inflation is a major concern around the world as pandemic effects linger - Quarterly Predictions, June 2022

New Zealand Institute of Economic Research (Inc)
Media Release, 31 May 2022
For immediate release
NZIER Quarterly Predictions, June 2022

Although New Zealand has passed its peak of COVID-19 infections, the outbreak's impact continues to linger in the economy. Activity is gradually returning to normal, but supply constraints remain apparent. In particular, labour shortages and global supply chain disruptions continue to constrain activity. Against the backdrop of unprecedented stimulus from the Government and the Reserve Bank underpinning solid demand, inflation has surged both here in New Zealand and abroad.

Principal Economist Christina Leung says, "Inflation has risen to well above the Reserve Bank's 1 to 3 percent inflation target band, and the central bank is now focused on reining inflation pressures in by tightening monetary policy. There remains a great deal of uncertainty over the economic outlook, as rising interest rates add to the headwinds of the war in Ukraine and continued supply chain disruptions".

Rising interest rates present further headwinds to households and businesses

Consumer and business confidence is already starting to weaken due to these headwinds, with increased caution weighing on spending and investment plans.

"The Reserve Bank is moving to tighten monetary policy at a much quicker pace than it had indicated earlier this year. We expect that as households roll off historically low fixed mortgage rates onto markedly higher rates, the impact of rising interest rates on demand will become more apparent later this year. This will slow the economic recovery and reduce inflation pressures over 2023."

"Beyond another 50 basis points OCR increase in the Monetary Policy Review meeting in July, we expect a more measured pace of tightening given the lagged impact of higher interest rates on demand."

Improved incomes should support debt serviceability

"Although there has been a softening in housing market activity in recent months, improved incomes are supporting debt serviceability. A tight labour market is supporting wage growth, while global export commodity prices remain historically high despite some recent easing. These factors should cushion some of the impacts of rising interest rates and reduce the chances of a hard landing for the New Zealand economy."

Quarterly Predictions is an independent review of New Zealand's economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER's members.

For further information, please contact:

Christina Leung, Principal Economist & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985