New Zealand's economic recovery remains uneven despite improving manufacturing activity and stronger business confidence. Kiwibank economists believe last week's Official Cash Rate increase risks placing additional pressure on households already struggling with higher borrowing costs.
Report by elocal
Based on reporting by Kiwibank Economics. Original report HERE.
OCR decision divides economists
Last week's Monetary Policy Review dominated New Zealand's economic landscape after the Reserve Bank lifted the Official Cash Rate by 25 basis points to 2.50 percent.
While financial markets had widely expected the increase, Kiwibank's economics team argues the decision may prove premature given the uneven nature of New Zealand's recovery.
The bank says households carrying large mortgages and businesses still recovering from recent economic shocks are likely to bear the greatest burden from higher interest rates.
Recovery remains uneven
Despite its criticism of the rate hike, Kiwibank acknowledges there are encouraging signs emerging across the economy.
Domestic manufacturing activity strengthened more than expected during June, helped by resilient overseas demand and a weaker New Zealand dollar, making Kiwi exports more competitive in international markets.
China's manufacturing sector has also remained firm, providing additional support for New Zealand exporters at a time when domestic demand continues to recover more slowly.
Kiwibank believes these international factors are supporting economic activity independently of domestic interest rate settings, suggesting higher borrowing costs may do little to influence export-led growth.
Businesses expected to regain confidence
Attention now turns to the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion, due for release this week.
Kiwibank expects business sentiment to improve compared with the previous quarter after easing oil prices and gradually stabilising international supply chains reduced some of the uncertainty created by conflict in the Middle East.
However, economists caution that confidence is unlikely to have returned to the stronger levels seen before the regional conflict disrupted global shipping and energy markets.
Markets expect further tightening
Although Kiwibank questioned the latest OCR increase, its economists still expect further rate rises later this year as the Reserve Bank continues its efforts to return inflation towards its two percent target.
Financial markets have also shifted their attention towards whether the Reserve Bank will continue following the tightening path outlined in its May Monetary Policy Statement.
The bank notes that inflation remains above target while recent economic data has generally surprised on the upside, strengthening expectations that interest rates could rise further over coming months.
Global uncertainty remains
International developments continue to shape New Zealand's outlook.
Investors spent much of last week assessing signals from the United States Federal Reserve while also monitoring renewed tensions in the Middle East.
Although oil prices eased after the partial reopening of the Strait of Hormuz, Kiwibank warns energy markets remain vulnerable should geopolitical tensions escalate again.
The report notes that any sustained increase in oil prices would likely flow through to inflation, placing additional pressure on central banks worldwide.
This week's economic watchlist
Kiwibank says several important economic indicators will help shape the outlook over coming days.
Among them are:
- The NZIER Quarterly Survey of Business Opinion.
- International migration and travel figures.
- Electronic card spending data.
- Selected price indexes.
- A speech by Reserve Bank Chief Economist Paul Conway focusing on inflation and the neutral interest rate.
- US inflation data and China's second-quarter GDP results.
Current, Long-Term or Historic Relevance?
The Reserve Bank's decision to increase the OCR highlights the delicate balancing act facing policymakers.
While inflation remains above target, higher interest rates also increase borrowing costs for households, businesses and property owners. Whether further tightening ultimately proves necessary will depend on how quickly inflation moderates and whether economic growth continues to strengthen without placing renewed pressure on prices.
For many New Zealanders, the most immediate impact will continue to be mortgage repayments. For exporters, however, a weaker New Zealand dollar may provide welcome support by improving international competitiveness.
As economic conditions continue to evolve, the focus will increasingly shift from whether rates have risen to whether the Reserve Bank's strategy succeeds in reducing inflation without unnecessarily slowing New Zealand's broader economic recovery.
Source
Original Report: First View – Matariki rises and so do interest rates
Author: Kiwibank Economics
Independent reporting. Original context. Credited sources.