Saturday, 6 Mar 2021

Economist says Reserve Bank could be the first to start raising rates

New Zealand’s Reserve Bank could be the first central bank of any advanced economy to hike interest rates – in 2022 – according to a Capital Economics report.

Capital Economics also sees strong economic growth in this calendar year – a 6.5 per cent lift in GDP – compared to consensus forecasts of 4.6 per cent.

New Zealand’s official cash rate sits at 0.25 per cent, which many economists expect will be as low as it goes.

Most central banks in the developed world have also set their official rates at close to zero.

The research house said the recovery in GDP and employment in both Australia and New Zealand was set to continue surprising to the upside.

As such, it expected the Reserve Bank of Australia to stop its quantitative easing bond buying programme in April.

“Meanwhile, we estimate that New Zealand’s economy has already returned to its pre-virus growth path,” it said.

“With the housing market overheating and surveys pointing to rising price pressures, we think the Reserve Bank could become the first advanced economy central bank to hike interest rates.”

Capital Economics expects the bank to make its move in the second half of 2022.

New Zealand’s GDP had already returned to pre-virus levels in the third quarter, whereas output in Australia was still 4 per cent below.

“Electronic card transaction data rose further in both countries in recent months, underlining that the recovery in New Zealand’s domestic demand is sustainable,” it said.

Capital Economics pencilled in another 2.5 per cent quarter-on-quarter rise in GDP in the fourth quarter of 2020 in both countries.

The further recovery of both economies would partly hinge on the speed of the Covid-19 vaccine rollout.

“One reason to be optimistic about the outlook is that housing markets in both countries are roaring back to life.

“House prices in New Zealand are rising by around 20 per cent year-on-year and those in Australia may soon be rising at a double digit pace, too.”

“New Zealand’s recovery will inevitably slow as output is now well above pre-virus levels.

“But our forecast that GDP will expand by 6.5 per cent this year puts us at the very top of the forecast range.”

Consensus for figures have 4.6 per cent annual average GDP growth for 2021, but off a low base due to the impact of Covid-19 on growth in 2020.

Capital Economics economist Ben Udy told the Herald in an email that the upbeat growth outlook for New Zealand was driven by continued strength in residential investment as the “red hot” property market encouraged new building and by the rapid rebound in consumption which has already occurred.

On the currency front, Capital Economics has been bullish on both the Australian dollar and the New Zealand dollar since last year’s sell-off when the Covid-19 first reared is head.

“We think both currencies will rise a bit further this year, but we expect the rally in the Aussie to peter out next year as growth in China slows and iron ore prices moderate.

“By contrast, our hawkish outlook for the Reserve Bank points to further upside for the Kiwi,” it said.

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