New Zealand raises interest rates as inflation, housing pressures build

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With economy showing signs of overheating, central bank hints at more growth next year

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New Zealand has massively affected Kovid-19. put out shutting down the outside world, a policy with incentives to keep the economy moving. Now the resulting labor shortage and rising demand, especially for housing, has made it one of the first developed economies to raise interest rates since the pandemic began.

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The Reserve Bank of New Zealand raised its benchmark rate from a record-low 0.25% to 0.5% and signals further growth in the next year, as it tries to control inflation high oil prices, rising transportation costs and supply-chain disruptions. It said the hike would also increase mortgage rates and therefore help to calm home prices, which are up about 30% over the previous year.

The central bank said the policy challenges are different from when the pandemic began.

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“Given the backing of the government and the flexibility of domestic and business balance sheets, the reduction in demand is less of a problem than the economy from a lack of capacity,” RBNZ said. It also highlighted a risk that some capacity bottlenecks could remain now that the South Pacific nation is ending its effort to eliminate the coronavirus locally.

New Zealand offers a preview of the challenges countries may face as they emerge from the pandemic. Rising home debt and inflation pose a greater threat to some economies than any resurgence of Covid-19 driven by the delta variant. South Korea and Norway have already tightened monetary policy, while interest rates in more volatile emerging economies from Brazil to Turkey have gone up.

On the east coast of Tauranga, a hub for container traffic, workers are short of capacity as demand recovers from the pandemic. global shipping rush Spokesperson Rochelle Lockley said the schedule had been jumbled adding to the demands of port staff.

The Bay of Plenty region, where the port is located, is known for its kiwifruit industry, which depends on a seasonal workforce from overseas. Closed range means competition for workers is fierce. In many cases, the port is dueling with its own customers for workers such as stevedores, cargo marshallers and drivers of giant machines that move containers, Ms Lockley said.

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New Zealand’s unemployment rate fell to 4.0% in the three months through June.

There has also been a shortage of health workers due to the closure of the border. There are about 1,000 vacancies for trained nurses in New Zealand – a 20% shortfall.

Carolyn Cooper, managing director of Bupa New Zealand, which runs a nursing home and retirement village, said it has raised salaries at a faster rate than its funding to retain employees.

“It’s impractical to keep going like that,” she said—but “otherwise we wouldn’t have any employees.”

Rising wages are adding to price pressures within the New Zealand economy, including higher prices for gasoline and agricultural produce such as tomatoes and cucumbers.

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Inflation expectations are now above the top end of the Reserve Bank of New Zealand’s target range of 1.0% to 3.0%. On Tuesday, the benchmark price of Brent crude rose to its highest level since October 2018, reflecting further inflationary pressures for the country dependent on oil imports.

The primary objectives of the RBNZ are full employment and 2% annual inflation over the medium term. However, the country’s government had directed it earlier this year Consider housing prices in monetary policy decisions.

New Zealand’s response to the pandemic ignited a local housing boom. The cost of building a new home was the biggest contributor to inflation in the three months through June, with companies reporting a shortage of construction materials and rising labor costs.

In March last year, the central bank reduced its cash rate by 0.75 per cent to 0.25% to boost activity. This made new home loans more attractive to owner-occupiers and speculators. The increase in New Zealand’s average home prices over the past year is the fastest among the 38 member states of the Organization for Economic Co-operation and Development.

The central bank has sought to curb lending to the property market, while the government has reduced tax benefits for landlords, but house prices continue to rise. Worldwide, rising home values ​​during pandemic spark new debate About housing affordability. On Wednesday, Australia’s financial regulator increased the minimum interest-rate buffer it expects lenders to use when assessing the ability of new borrowers to meet home-loan repayments.

The rhetoric of the Reserve Bank of New Zealand generally plays a role in accommodation in its monetary-policy decisions, although with inflation, employment and home prices all moving in the same direction, it may now be expedient to include it, Gareth said Kiernan, chief forecaster at Infometrics, an economics consulting firm.

It will help “remove any political criticism that might otherwise get in their way for not doing enough to slow the housing market,” he said.

In August the central bank projected that the cash rate would reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, although some economists doubt it will exceed 1.5%. The new estimates are not due until the end of November.

To read more from The Wall Street Journal, Click here.


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