RBNZ cash rate hikes ‘appropriate’ in near term: IMF

Bloomberg

New Zealand’s central bank should continue with the swift normalisation of monetary policy to curb a growing inflation threat, according to the International Monetary Fund (IMF).
“Given New Zealand’s strong cyclical position and inflationary pressures, significant increases in the official cash rate in the near term are appropriate,” the IMF said in the Concluding Statement of its Article IV review of the economy, released Thursday in Wellington. While monetary policy should remain data dependent, “continued, swift policy normalization will be appropriate under baseline conditions,” it said.
The Reserve Bank last month raised the OCR by 25 basis points to 1% but said it considered taking a more aggressive 50 basis-point step as inflation hit a 30-year high of 5.9%. A majority of bank economists expect the RBNZ to maintain a steady pace of tightening through 2022, but ANZ Bank is forecasting two 50-point hikes in April and May.
The IMF said a tight labour market, commodity price pressures related to the war in Ukraine, and continued supply chain disruptions add to signs that inflation will rise further in the near term and stay well above the RBNZ’s 1-3% target range this year.
At the same time, it expects the New Zealand economy to grow 2.7% in 2022, half the pace achieved in 2021. The IMF said a weakening global economy may hurt exports, and the withdrawal of monetary and fiscal stimulus will contribute to moderating growth.
Domestic risks center on financial stability and the impact of a slowing housing market.
“Loan-to-value ratio restrictions to address financial stability risks should be maintained, and work to expand the macro-prudential policy toolkit to include debt-to-income limits and minimum standards for serviceability assessments is welcome,” it said.
While broadly supportive of government strategies, the IMF urged more effort to meet greenhouse gas emissions goals and cautioned about the pace of minimum wage increases.
It also urged a review of 28% company tax rate, saying “transitioning from relatively high corporate income tax to other sources, such as capital gains and possibly land taxes, would improve efficiency without
reducing aggregate revenues.”