24 November 2022
Key Points
- Interest rates continue to rise, combating inflation
- Intensifying COVID pressures
Interest Rate Update – NEW ZEALAND
New Zealand’s central bank delivered a record rate hike on Wednesday by 75 basis points to 4.25% and warned the economy might have to spend an entire year in recession to control inflation.
This marks the RBNZ’s ninth straight hike which means the cash rate has now risen 400 basis points since October 2021 and is the most aggressive policy tightening since 1999 when the cash rate was first introduced.
The RBNZ said lifting the pace of rate tightening was necessary to return inflation within its 1-3 per cent per annum target range with Governor Adrian Orr signalling further rate increases are to be expected ahead.
Getting inflation down is the bank’s ‘‘sole target’’, with Orr saying the ‘‘longer inflation stays up, the more likely people are going to be demanding higher nominal wages’’.
However, AMP senior economist Diana Mousina sees risks in overtightening, warning the RBNZ appears to be focused on recent inflation rather than signs global inflation is easing.
‘‘The issue is that the central banks could potentially keep hiking even though their inflation forecasts are coming down,’’ she said.
‘‘The risk is that these central banks that are changing interest rates based on the current inflation situation and not looking ahead enough to the future to see actually inflation is expected to come down quite dramatically, especially goods prices.’
The New Zealand dollar jumped 0.5 per cent to US61.72¢ and climbed an eight-month peak against the Australian dollar on the news, as the difference in interest rates between the countries widened.
New Zealand government bond yields rose sharply and the two-year swap rate, which reflects interest rate expectations, leapt 22 basis points to 5.3 per cent.
Interest Rate Update – AUSTRALIA
Meanwhile, in Australia, on October 4, the RBA to the surprise of economists pared back its pace of rate hikes with a 0.25 percentage point increase to 2.86 per cent and is expected to rise again by 0.25 percentage points at its December meeting.
RBA governor Philip Lowe warned on Tuesday that an increasing prevalence of supply-side shocks – such as a reversal of globalisation, ageing populations and climate change – meant it would be ‘‘more challenging’’ for central banks to keep inflation low.
Interest Rate Update – CANADA
The Bank of Canada slowed its pace of rate increases last month as recession fears mounted, while some US Federal Reserve officials back a shift lower to half-point increments after inflation slowed more than expected.
Global – CHINA
Asian share markets and oil prices slipped on Monday as investors fretted about the economic fallout from the intensifying COVID situation in China, with the risk aversion benefiting bonds and the dollar.
Beijing reported 962 new infections, up from 621 a day earlier. Its sprawling Chaoyang district, home to 3.5 million people, urged residents to stay home, with schools going online.
The equity market continues to rise because investors are expecting a less hawkish move from the Fed. The share market is always looking forward and is heavily priced in the market’s expectations and sentiment. If you are looking for certainty, bonds may be an option.
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