The Reserve Bank of New Zealand, at its Monetary Policy Meeting held today, 22nd February, has voted to increase its Official Cash Rate by 50 basis points to 4.75%. This latest increase marks the tenth consecutive rate hike since August 2021, for a whopping total bump of 450 basis points to try and get inflation back in line with the target around 2%.
Daily Chart NZD/USD from the ActivTrades online trading platform, showing that the pair is losing bullish momentum as the USD is strengthening.
The NZD/USD might be about to validate a double top on its daily chart, leading to potentially more losses.
RBNZ pushes rates higher, says the strategy is slowly working
It's been a choppy start to the year for the island nation, as new Prime Minister, Chris Hipkins was sworn in late last month after Jacinta Ardern chose to resign from her position after nearly two terms. The RBNZ in its statement also made mention of the devastating cyclone that claimed at least 11 lives and has caused billions of dollars worth of damage in recent weeks.
There's an outside hope that the end of increasing rate hikes may come soon for struggling Kiwis though, as key financial and economic data is beginning to show small signs of the cooling inflation that the central bank has fought tooth and nail to achieve.
Inflation is still holding strong, but has it peaked?
In the 12 months leading up to December last year, inflation rose again by 7.2% according to the latest CPI data released by Stats NZ. This rise followed an annual increase of 7.2% in the third quarter, and 7.3% in the quarter before, prompting some economists to forecast that inflation has only room to fall from here.
The largest drivers of inflation in the last measured quarter were housing and household utility costs, with the increasing price of food following shortly after.
Extreme tightness in the labor market also persists, according to the RBNZ, with employment much above its sustainable level.
In the three months ending in December last year, the unemployment rate was still 3.4%, and accelerating wage rises due to worker shortages has helped sustain family earnings, but also contributed to domestic inflation by pushing expenses higher.
Many households are still yet to feel the full impact of rate rises in this tightening cycle so far, as their mortgages have been on short-term fixed low rates.
This year, a large number of these homeowners will come to the end of their fixed term contracts, and this likely will quickly grind their cash reserves and spending to a halt. Demand will fall shortly thereafter and if the strategy of the RBNZ is successful, inflation should dramatically follow suit in the second half of this year.
According to both the ANZ and Kiwibank, inflation has already reached its peak, and is gradually declining both internationally and domestically. By as early as the end of this year, they predict inflation will have reduced close to that of the RBNZ's 1%-3% target range again.
Housing prices plummeting as mortgages begin to shift to higher borrowing rates
New Zealand's housing market crash is getting more dramatic, according to the Real Estate Institute of New Zealand's (REINZ) January housing market findings.
The Index, which accounts for variations in the composition of homes sold from month to month rather than relying on title changes based on sales that may have taken place many months earlier, fell by 0.2% in January, bringing the year-over-year loss to 13.9%.
The number of houses available for sale has risen by 60% or more in more than half of New Zealand's fourteen regions in the last year, which is despite the fact that there has been a decline in new listings of 16% over the same period.
Demand has now well and truly taken a dive in the very recently booming property sector of the economy.
Many new homeowners who bought while the OCR was at historic lows of 0.25% in 2020 and 2021, will soon be having their home loans shift from their low fixed rate to the much higher variable one, which could see them go from 2 or 3% to up to 7% borrowing rates.
It's a similar story to Australia, whereby a ‘mortgage cliff’ is on the way for many homeowners. This means a dramatic increase to their monthly expenses, and will potentially put some mortgage owners in the precarious position of having negative equity, which occurs when the level of debt is higher than the value of the property that they own.
For many, it's difficult to imagine how the housing market will rebound in the coming 12 months to 2 years, with recession still looming, and interest rates set to hit their peak at around 5.25% or more by the middle of this year before plateauing. However, one thing is for certain that the arduous process of returning to 2% inflation will come at the cost of a great many New Zealanders losing the ability to afford to pay for their homes.
Severe storms could cause inflation to linger
Eleven people have died as a result of the devastating impact of Cyclone Gabrielle, with many more still unaccounted for more than a week after the storm has passed.
On February 12th, the cyclone made landfall in the northernmost part of the North Island and continued its destructive path along the island's eastern coast.
New Zealand's new Prime Minister Chris Hipkins has declared Gabrielle the worst natural catastrophe the country has experienced this century.
The RBNZ highlighted in its statement that the storms had caused serious damage and interruption across a wide range of sectors, including manufacturing, transportation, and communications.
Because of this, there may be shortages of certain products and services in the near future, and as a consequence, there will likely be continued high levels of upward pricing pressure, adding further to inflation. It said that activities related to the rebuilding of homes and businesses will pick up pace during the next several years.
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