Kiwibank economists are warning that any move to raise interest rates in the current environment would be “tone deaf” and potentially “reckless,” as New Zealand households and businesses grapple with rising costs and global uncertainty.
In a sharply worded commentary, Kiwibank Chief Economist Jarrod Kerr and economist Alexandra Turcu argue that the Reserve Bank of New Zealand (RBNZ) risks repeating past mistakes if it tightens monetary policy too soon. (Kiwibank)
Cost Pressures — Not Demand — Driving the Economy
According to Kiwibank, the current inflation environment is fundamentally different from the post-COVID surge.
“This is not a demand story,” the economists state, pointing instead to rising costs — particularly fuel — as the primary driver of inflation. (Otago Daily Times Online News)
They warn that increasing interest rates in response to cost-driven inflation could further suppress already weak economic activity.
“Both businesses and households are struggling with increased costs, not surging demand,” they note. (Kiwibank)
Middle East Conflict Adding to Uncertainty
A key factor behind the current economic outlook is the ongoing instability in the Middle East, which continues to place upward pressure on fuel prices and business costs.
Kiwibank says the uncertainty is already causing:
- Reduced business confidence
- Lower investment intentions
- Hiring slowdowns
- Households “bunkering down” financially (Kiwibank)
The bank warns that a domestic fuel shock remains a real risk, with potential to further weaken economic conditions.
Risk of Recession
Kiwibank economists are forecasting a possible contraction in economic activity in the current quarter — though they caution that official data will lag behind real-world conditions.
Crucially, they argue that the RBNZ may not yet have sufficient data to justify any rate hikes.
- Q2 inflation data will not be available until July
- A clear inflation trend may not emerge until Q3 (Kiwibank)
Raising rates before that, they warn, could trigger unnecessary economic damage.
“Raising interest rates risks a repeat of past mistakes, potentially inducing a recession.” (Otago Daily Times Online News)
Call for ‘Wait and See’ Approach
Rather than acting prematurely, Kiwibank is urging the central bank to hold steady and assess incoming data before making any policy moves.
“Our view is to watch, wait, and weigh up the facts,” the economists state. (Kiwibank)
They emphasise that the current environment does not require aggressive intervention, as higher costs are already dampening demand across the economy.
A Divided Outlook
Kiwibank’s position contrasts with other major banks, including ANZ, which have forecast multiple interest rate hikes later this year.
However, Kiwibank maintains that such moves would be premature given:
- Weak GDP growth (around 1.3%)
- Elevated unemployment (5.4%)
- Inflation already easing toward target levels (Kiwibank)
Bottom Line
Kiwibank’s message is clear:
New Zealand’s economy is already under pressure.
Adding higher interest rates into that environment may not solve inflation - but could deepen the slowdown.
And in their words…
It could be reckless.