The RBNZ Will Crush Inflation

The RBNZ Will Crush Inflation

Joseph Darby

Interest rates will crush everything

The RBNZ is New Zealand’s central bank. Central bankers the world over are fighting a resurgence in inflation, and New Zealand is leading the charge with some of the highest inflation – and highest interest rates – among developed countries.

Some argue that central banks have failed to prevent financial crises and economic downturns, while others contend that their actions have exacerbated these problems. Additionally, some critics question the independence of central banks and argue that they are subject to political pressures and interests.

Countering this, supporters of the status quo note central banks play a crucial role in maintaining economic stability and ensuring the smooth functioning of financial systems. They have a mandate to promote price stability, maintain full employment, and support the growth of the economy. Central banks have been instrumental in stabilising financial markets during times of crisis, preventing runaway inflation, and providing liquidity to banks and other financial institutions.

Before we explore what might happen next, and what this all might mean for your finances, let’s cover a little background.

Background – What Is the RBNZ?

The RBNZ is a government body which can be considered the ‘bank of the banks’. Its main role is to keep prices stable by controlling levels of inflation, which is how much prices go up over time.

To avoid confusion, note that Westpac performs the government’s banking, while KiwiBank is owned by the government.

The RBNZ sets the price that commercial banks must pay to borrow from it, and in doing so influences the rate that commercial bank customers receive (savers) or pay (borrowers). Commercial banks include Westpac, ANZ, KiwiBank, ASB, BNZ, TSB and others. While the RBNZ sets the interest rate, the rates of mortgages and saving rates for Kiwi families are also affected by money borrowed from offshore at global interest rates, which can be impacted by a variety of international circumstances such as wars, disasters and major economic events. Basically, the RBNZ helps the banks we all use set the rate of interest you gain on your savings, and how much interest you must pay on a mortgage.

“The RBA got it wrong, now it will crush everything”

This recent comment by a well-regarded Australian fund manager talking about the Reserve Bank of Australia (RBA, the Australian equivalent to the RBNZ) applies even more so to New Zealand. Make no mistake, the RBNZ is lavishly staffed with hundreds of highly educated and talented people – yet they were still very wrong, and now many Kiwis are already paying the price, literally.

Money Printing

In 2021, the RBNZ implemented quantitative easing (QE) by printing record amounts of money and purchasing assets such as government bonds to provide liquidity to the market and support the economy during the pandemic. The move was designed to encourage borrowing and spending, which would stimulate economic growth. At the time, the RBNZ believed that any inflation caused by QE would be temporary

Even in late 2021 the RBNZ were still saying things like:

“…high inflation is expected to be temporary… annual inflation is expected to ease towards our 2% target midpoint in 2022. Expectations for inflation in two or more years’ time remain anchored near 2%.”

Even during the pandemic, our RBNZ was among many across the world being openly criticised for their approach – including extraordinary public criticism by its former Governor.  

Present Day, Crushing It

Fast forward to the present day, and crushing inflation is widely regarded as being in all our best long-term interests. There will be short-term casualties to achieve the common goal.

The RBNZ is now partway through its steepest-ever series of interest rate hikes. Interest rates are being hiked to counter inflation. While raising interest rates may be necessary, it can have significant negative consequences for individuals and businesses with heavy debts.

Higher interest rates are a blunt instrument designed to crush the economy.

Higher interest rates crush financially weak or over-leveraged businesses, crush financially weak or over-leveraged households and individuals, crush consumer spending, and crush the housing market.

There are two sides to this:

  • It is crucial to remember that the RBNZ is taking action to address a significant issue and that the situation could be much worse if they did nothing.
  • It is also essential to be aware that the RBNZ's actions may have unintended consequences. For example, higher interest rates could cause the exchange rate to rise, making exports more expensive and potentially harming the economy. This can have flow-on effects for ‘everyday Kiwis’, and nearly everyone has probably already noticed the cost-of-living crisis.

Where Next for Interest Rates?

Interest rates are expected to continue to rise in the coming months, then stabilise, then steadily fall thereafter.

However, nobody really knows!

Ultimately, the RBNZ's decision to raise interest rates should help stabilise the economy in the long run and prevent inflation from spiraling out of control. It is critical to remain informed and keep a close eye on developments in the economy, as there is always a risk of unforeseen consequences when central banks make significant decisions.

The Bottom Line: where next for interest rates?

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.“ ~ William Arthur Ward

Just like a sailor dealing with the wind, there’s little point in getting worked up over what you can’t control. Instead, stay focussed on what the overall economic movements – including interest rates – might mean for you personally, and what steps you can take to practically improve your situation.

If you’d like to have a complimentary and no-obligation chat about what this all might mean for you, and how you can turn the current situation to your advantage, it would be our pleasure to meet and explore your options in a complimentary initial consultation.

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