Rising Interest Rates and Stubborn Inflation Poses Challenge for NZ Housing Market and Businesses

Date Published: 1 May 2024

Key Facts

• The Reserve Bank increases interest rates to fight inflation which leads to decreased consumer spending.
• Many households are currently experiencing financial strain due to the central bank’s decision, however, this is not the goal.
• Currently, businesses are holding back from raising their selling prices and are possibly experiencing compressed margins or seeking cost savings.
• The issue is that businesses continue to plan to raise their prices. Until this changes, there will be no easing of monetary policy or recovery in the housing market.
• According to the ANZ’s monthly Business Outlook Survey, the proportion of businesses saying they planned to increase their prices in the coming year was 25% on average when inflation averaged just above 2% in New Zealand from 1992 to 2020, and is currently at 47%.
• The next Reserve Bank cash rate review will be on May 22, however, it is unlikely that the bank will plan to cut the official cash rate from 5.5% before their planned date of mid-2025.
• Housing market conditions are projected to be challenging for vendors throughout winter this year.

Article Summary

The Reserve Bank’s method of controlling inflation by raising interest rates has currently resulted in a decrease in consumer spending. Many households are feeling the financial strain, but the overall goal is to see businesses hold back on increasing their selling prices. However, a significant issue is that despite this spending weakness and falling business sentiment, businesses continue to plan price increases.

Findings from ANZ’s monthly Business Outlook Survey reveal that while the proportion of businesses planning price increases in the coming year averaged 25% when inflation in New Zealand was just above 2% from 1992 to 2020, it’s currently at 47%. Despite the current economic climate, there is little hope that the Reserve Bank will cut its official cash rate from 5.5% in its next review on May 22.

Mortgagers can expect interest rates to stay close to current levels until well into the September quarter. It is by then expected that businesses might reassess their pricing plans and the Reserve Bank can turn its attention to the weak state of the economy and give less emphasis to fighting excessive inflation.

The housing market is anticipated to be challenging for sellers this winter, largely due to persistent inflation both domestically and globally. This is in contrast to earlier predictions at the start of the year where the financial markets in the United States had expected multiple rate cuts by the Federal Reserve.

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