NZIER: Inflation and rising interest rates remain key headwinds for the economy

In its latest Quarterly Predictions, The New Zealand Institute of Economic Research (NZIER) said that rising interest rates and high inflation worldwide pose a threat to New Zealand’s economic recovery over the coming years.

Key takeaways

“Central banks globally have lifted interest rates at a rapid pace in response to the widespread surge in inflation.”

“However, resilient demand and continued capacity pressures are keeping costs high in the New Zealand economy.”

“The Reserve Bank expects to undertake further substantial monetary policy tightening in order to dampen demand to rein in inflation.”

“We expect the negative impact of higher interest rates on demand will become more apparent around mid-2023, such that the Reserve Bank will not need to increase interest rates by as much as it currently expects to.”

“Nonetheless, we expect further increases in the OCR and for it to peak at 5 percent over the coming year."

Market reaction

Despite a cautious risk tone, NZD/USD is recovering ground toward 0.6200. as the US Dollar is fading its recovery momentum. The pair is trading at 0.6185, up 0.33% on the day, as of writing.