Sunday, July 25, 2021
Times of Georgia
HomePoliticalInflation Is Rising And So Are Interest Rates.

Inflation Is Rising And So Are Interest Rates.


Inflation rose a massive 1.3% in the June quarter, much
higher than consensus of 0.7%, and even our 1.0% pick.
Prices rose 3.3% over the year, with chunky gains in
construction costs, transport costs, Food, and… the gains
were broad based. Core measures of inflation also printed
between 3-to-3.3% over the year. Inflation is now
‘officially’ above the RBNZ’s mandated 1-3%yoy target
band.

We have seen a quantum shift in expectations and
business confidence. And we’re in a different pricing
environment. Businesses are less worried about demand and
more worried about supply.

We now expect the RBNZ to
lift the cash rate in August, in what will be the first of
at least three hikes from here. An earlier lift off from the
RBNZ will (hopefully) mean less work will need to be done to
restrain the economy in the future.

It’s confirmed!
Inflation is accelerating and is now through the top of the
RBNZ inflation target band. Inflation is set to hold above
the top of the target band next quarter. June quarter CPI
inflation came in above our expectations at 1.3% in the
quarter according to StatsNZ, and annual inflation hit 3.3%
– the highest rate in over a decade. But a jump in annual
inflation from 1.5% at the start of 2021 was expected. In
part because of the base effects from last year’s lockdown
induced fall in prices. The last time the annual inflation
rate tested such heights was in June 2011, rising to 5.3%
due to GST hikes.

What was most interesting was the
broad-based nature of inflation pressure evident in
today’s report. Demand in the economy has been
consistently strong since coming out of last year’s level
4 lockdown. And combined with supply side constraints –
such as firms facing challenges in sourcing labour and
materials – we have a recipe for price rises. Almost all
groups in the CPI basket recorded price rises. Core measures
of inflation have also strengthened. Both tradables
(imported) and non-tradables (domestic) inflation popped
back up in the June quarter.

Some of the key drivers
of inflation are expected to be transitory. Global
supply-chain disruption should be addressed as the world
gets back to a new normal – taking the pressure off
shipping costs. Labour shortages will hopefully abate next
year as our, by then, vaccinated country starts the process
of opening back up to the world. But for the RBNZ, these
transitory factors could easily turn into permanent
inflation in the current atypical environment. So, something
has to give, and the RBNZ is now willing to oblige.

We
are in a different pricing environment, one where businesses
are much more willing and able to pass on higher prices.
Businesses are less worried about demand, and more worried
about supply.

We now expect the RBNZ to lift the cash
rate in August, in what will be the first of at least three
hikes from here. We’re likely to see two hikes by year
end, and a push to 1% by February. Beyond 1% will depend on
the interest rate sensitivity of the economy coming off
record low rates. We have pencilled in another lift in the
cash rate to 1.5%, but likely to be all we see in the
near-to-medium term. An earlier lift off from the RBNZ will
(hopefully) mean less work will need to be done to restrain
the economy in the
future.

© Scoop Media

 



Source link

- Advertisment -
Times of Georgia Times of Georgia Times of Georgia

Most Popular