New Zealand raises interest rates as inflation and housing pressures rise

New Zealand largely kept out of Covid-19 By closing off to the outside world, a policy accompanied by incentives to keep the economy moving. Now, the resulting labor shortage and rising demand, particularly for housing, have led it to become one of the first advanced economies to raise interest rates since the pandemic began.

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The Reserve Bank of New Zealand raised its benchmark interest rate to 0.5% from a record low 0.25% and signaled more increases over the next year, as it seeks to tame the inflation it has fueled. Oil price hike, rising transportation costs and supply chain disruptions. She said the increase would also raise mortgage rates and thus help cool home prices, up about 30% over the past year.

The central bank said the policy challenges are different from when the pandemic began.

“Lack of demand is less important than an economy hitting capacity constraints given the effectiveness of government support and the resilience of household and business balance sheets,” the Reserve Bank of New Zealand said. It also highlighted the risk of some capacity bottlenecks continuing now that the South Pacific nation has ended its efforts to stamp out the coronavirus locally.

New Zealand View a preview of the challenges countries may face as they emerge from the pandemic. Rising household debt and inflation are becoming a bigger threat to some economies than any recovery COVID-19 Driven by a delta variable. South Korea and Norway have already tightened monetary policy, while interest rates in the most volatile emerging economies from Brazil to Turkey also rose.

In the east coast port of Tauranga, a hub for container traffic, a shortage of workers is limiting capacity as demand recovers from the pandemic. global freight congestion The chaos messed up schedules, spokeswoman Rochelle Lockley said, adding to the demands on port employees.

The Bay of Plenty, where the port is located, is known for its kiwi fruit industry, which relies on a seasonal workforce from abroad. Closed borders mean competition for workers is fierce. Ms Lockley said the port in many cases competed with its clients for workers such as loaders, unloaders, freight drivers and drivers of giant machinery moving containers.

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New Zealand’s unemployment rate fell to 4.0% in the three months to June.

The closing of the borders has also exacerbated the shortage of health workers. New Zealand It has about 1,000 vacancies for trained nurses – a 20% shortage.

In order to retain employees, salaries have increased at a faster rate than their funding growth, said Carolyn Cooper, managing director of Bupa New Zealand, which operates nursing homes and retirement villages.

“It is not possible to continue down this path,” she said, but “otherwise we would not have staff.”

Higher wages add to price pressures within the New Zealand economy which include higher prices for gasoline and agricultural products such as tomatoes and cucumbers.

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Inflation expectations are now above the upper end of the RBNZ’s target range of 1.0% to 3.0%. On Tuesday, the benchmark price of Brent crude hit its highest level since October 2018, which portends further inflationary pressures in a country dependent on oil imports.

The primary objectives of the RBNZ are full employment and annual inflation of 2% over the medium term. However, the country’s government earlier this year directed it to Looking at home prices in monetary policy decisions.

New Zealand’s response to the pandemic has sparked a boom in the local housing sector. The cost of building a new home was the biggest contributor to inflation in the three months to June, as companies reported shortages of building materials and rising labor costs.

In March last year, the central bank cut the cash rate by 0.75 percentage points to 0.25% to support activity. This made new home loans more attractive to resident owners and speculators. New Zealand’s rise in average home prices over the past year is one of the fastest among the 38 OECD member countries.

The central bank sought to calm the real estate market with limits on lending, while the government cut tax benefits for landlords, but housing prices continued to rise. Across the world, rising home values ​​during the pandemic are sparking new debates About affordability of housing. On Wednesday, the Australian financial regulator raised the minimum interest rate buffer it expects lenders will use when assessing the ability of new borrowers to meet home loan repayments.

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Gareth Kiernan, RBNZ President, said RBNZ rhetoric usually downplays the role of housing in its monetary policy decisions, although inflation, employment and house prices are all heading in the same direction, it might be appropriate to include them now. Forecaster at Inmetrics, an economics consulting firm.

That would “help deflect any political criticism that might come their way for not doing enough to slow the housing market,” he said.

The central bank in August expected the liquidity ratio to reach 1.6% by the end of 2022 and 2.0% in the second half of 2023, although some economists doubt it will exceed 1.5%. The new forecast is not due until late November.

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