Rolling rate rises continue for NZ, South Korea

Big rate rises Wednesday from two leading Asian central banks in South Korea and New Zealand.

Both came up with half a per cent boosts to their official indicator rates while a third central bank, the Bank of Canada, was expected to lift its key rate by 0.75% overnight Wednesday.

Rising inflation is the driver in these decisions, as it is in other countries.

The rise from the Bank of Korea follows a 25-basis-point increase at its previous meeting in May. It is the first time that the central bank has raised the benchmark rate by 50 basis points, taking a so-called “big step.”

South Korean inflation jumped to a 24 year high annual rate of 6% in June, from 5.4% in May as higher prices of industrial goods, services, agricultural products and energy bills added to inflationary pressures from higher commodity prices such as oil, gas, coal and agricultural products.

The Reserve Bank of New Zealand (RBNZ) lifted its benchmark official cash rate target from 2% to 2.5%, while the Bank of Korea (BoK) also raised rates by half a per cent to 2.25%.

It was the 6th straight interest rate hike from the RBNZ and the third half a per cent rise in a row as the Kiwi central bank maintains the most aggressive monetary policy tightening among major economies.

The 2.50% for the Kiwi OCR is the highest since March 2016 and there was no sign from the post meeting statement Wednesday that the RBNZ has finished its campaign

It repeated its previous comments that it will ‘Continue to lift the OCR (Official Cash rate) to a level where it is confident consumer price inflation will settle at that level.”

“The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment,” The RBNZ said in Wednesday’s statement.

The statement painted a picture of a NZ economy still out of whack and too strong for the central bank’s liking.

“In New Zealand, domestic spending remains supported by high employment levels, resilient household balance sheets in aggregate, continued fiscal support, and a strong terms of trade. The reduction in COVID-19 health-related restrictions is also enabling increased demand.

“Labour and resource scarcity are also contributing to upward price pressures which are currently exacerbated by seasonal illness, a resurgence in COVID-19 cases, and a net outflow of labour abroad.

“In these circumstances, spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflation pressures. Employment remains above its maximum sustainable level and the Reserve Bank’s core inflation measures are around 4 percent.

“The Committee acknowledged there is a near-term upside risk to consumer price inflation and emerging medium-term downside risks to economic activity.”

“The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range.

“The Committee is comfortable that the projected path of the OCR outlined in the recent May Monetary Policy Statement remains broadly consistent with achieving its primary inflation and employment objectives – without causing unnecessary instability in output, interest rates and the exchange rate.

“Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level,” the RBNZ said.

The rise came as the RBNZ agreed that the global economic situation was slowing “…the pace of global economic growth is slowing. The broad-based tightening in global monetary and financial conditions is acting to reduce spending growth. Asset prices have also declined due to higher interest rates and a weaker earnings outlook.”

It is clear from the decision and the statement that the Kiwi central bank, faced with a whole lot of supply factors it cannot impact (like the RBA in Australia and other central banks), is determined to suppress domestic demand inside NZ to the point where there is some sort of supply-demand equilibrium.

The question remains in NZ (as it is around the world), can this be done without triggering a recession and a surge in unemployment?

For Australia there’s no impact on thinking at the Reserve Bank from the RBNZ decision. The inflationary pressures here are just as problematic as they are in NZ and South Korea for that matter.

Local economists have factored in another 0.50% rise at the RBA’s August monetary policy meeting.