{"id":902055,"date":"2026-09-23T03:48:16","date_gmt":"2026-09-23T03:48:16","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/902055\/"},"modified":"2026-09-23T03:48:16","modified_gmt":"2026-09-23T03:48:16","slug":"inside-economics-if-the-economy-still-sucks-why-is-the-rbnz-hiking-rates","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/902055\/","title":{"rendered":"Inside Economics: If the economy still sucks, why is the RBNZ hiking rates?"},"content":{"rendered":"

My understanding is that interest rate increases are designed to slow the economy and thereby slow inflation increases. But oil prices are slowing the economy anyway!<\/p>\n

Oil price increases are judged inflationary, but surely increasing interest rates is a double whammy? Please explain.<\/p>\n

Regards,<\/p>\n

Rex Alder<\/p>\n

A: Thanks Rex, great question and I know it\u2019s one that quite a few people will have top of mind right now.<\/p>\n

There\u2019s no question that oil price inflation is imported (what economists call tradeable) inflation and there isn\u2019t much the Reserve Bank (RBNZ) can do about that.<\/p>\n

Elevated fuel prices have also been called a tax on consumers because when petrol costs more at the pump, it immediately hits the spending power of most consumers.<\/p>\n

And, by the RBNZ\u2019s own assessment, consumer spending remains weak and is a missing piece of the puzzle in New Zealand\u2019s economic recovery.<\/p>\n

Put those two points together and it\u2019s not hard to see why people are questioning the need for rate hikes this year.<\/p>\n

In fact, there is no shortage of debate about this in the economic community.<\/p>\n

You\u2019ve only got to look at the divergence of opinion between Kiwibank and BNZ economists.<\/p>\n

Kiwibank\u2019s Jarrod Kerr has argued that the RBNZ shouldn\u2019t be hiking at all this year.<\/p>\n

But BNZ\u2019s Stephen Toplis was at one point making the case for 25-basis-point hikes at every meeting until the Official Cash Rate (OCR) reaches 4% in May 2027.<\/p>\n

Anyway, let me explain the RBNZ\u2019s logic and you (and other readers) can make up your own minds on whether you think it holds up.<\/p>\n

The RBNZ can and has looked through the initial oil shock. That is why inflation has been allowed to sit above 3% (it hit 4.1% in the June quarter).<\/p>\n

But the length of time that it stays elevated starts to become a problem.<\/p>\n

Contagion<\/p>\n

Think of inflation like a virus. Unfortunately, it is highly contagious.<\/p>\n

The RBNZ is highly alert to the risk that higher fuel prices are passed on through the economy until inflation takes hold more broadly.<\/p>\n

This is what economists call the \u201csecond-round effects\u201d.<\/p>\n

Airlines lift airfares to cover fuel costs. Freight and logistics costs get passed through to supermarket prices.<\/p>\n

Workers, seeing their cost of living rise, push harder for wage increases in negotiations.<\/p>\n

Businesses, expecting costs to keep climbing, get bolder about lifting their own prices \u201cjust in case\u201d.<\/p>\n

That\u2019s the domestically generated part of inflation (what economists call non-tradeable).<\/p>\n

Unlike the oil price, the RBNZ does have influence over this bit because it\u2019s driven by how much spare capacity there is in the economy and how confident people feel that prices will keep rising.<\/p>\n

So the bank\u2019s reasons for lifting the OCR in the past few months are:<\/p>\n

1) it is worried oil-shock inflation might become embedded in the domestic economy;<\/p>\n

2) that the economy is actually starting to pick up. It\u2019s pretty subtle (0.2% growth in the second quarter) but we have now had four successive quarters of growth.<\/p>\n

That means there is less spare capacity in the economy than there was.<\/p>\n

Looking at unemployment, you can easily see (as per Kiwibank\u2019s Jarrod Kerr) that the labour market is still very weak, consumer spending is low and therefore the economy still has a way to go before it hits capacity.<\/p>\n

The RBNZ has been very explicit.<\/p>\n

Slowing growth a little now is, in the RBNZ\u2019s judgment, the cheaper way of avoiding entrenched inflation and an even sharper slowdown later.<\/p>\n

As Governor Anna Breman put it in the Monetary Policy Statement: \u201cThis decision reduces the risk that the OCR needs to increase by more later.\u201d<\/p>\n

The snappiest answer to your question, then, is that the RBNZ is looking forward and trying to set the OCR for where the economy is headed.<\/p>\n

It sees oil prices slowing the economy, but not by enough to leave rates at cyclical lows.<\/p>\n

But wait! There\u2019s more …<\/p>\n

While I\u2019m putting the RBNZ\u2019s case, there are a couple of other points I should make.<\/p>\n

One is that it now has a single mandate to target inflation.<\/p>\n

Under the last Government, there was a dual mandate, which required the RBNZ to balance targeting inflation against the unemployment rate.<\/p>\n

That change, in my view, enables the RBNZ to be more ruthless about lifting rates, because it is not mandated to worry about the unemployment rate.<\/p>\n

Finally, we should remember that the OCR has been (and still is) below neutral.<\/p>\n

That means that even after two hikes (taking the OCR to 2.75%), we still technically have a rate that is designed to stimulate economic growth.<\/p>\n

The RBNZ estimates that the neutral rate is between 2.5% and 3.5% (so probably around 3%).<\/p>\n

In theory, it\u2019s only when it goes above that level that it is actually slowing the economy.<\/p>\n

Of course, that\u2019s the theory. I think people are still influenced by the direction of travel.<\/p>\n

So in relative terms, lifting rates, even from a low base, does send a signal and slows the pace of the economy.<\/p>\n

With that neutral rate in mind, the decision to err on the side of caution and hike early wasn\u2019t too hard for the RBNZ to justify.<\/p>\n

Things will start to get a bit more interesting from here \u2013 especially if the economy stays sluggish and we don\u2019t see inflation start to fall.<\/p>\n

Where next?<\/p>\n

On Monday, ANZ economists released revised OCR forecasts<\/a> and now expect the RBNZ to hike three times (October, February and March), taking it to 3.5% before it lets it sit for several months.<\/p>\n

\u201cThere are three main drivers of the change in forecast,\u201d ANZ chief economist Sharon Zollner said in a research note. \u201cHigher oil prices and crack spreads [the price difference between crude oil and its refined products], a lower exchange rate and a better starting point for the economy than the RBNZ assumed.\u201d<\/p>\n

One of the interesting points Zollner raised was the possibility that the so-called \u201cneutral rate\u201d may be edging higher than what the RBNZ has previously forecast (2.5% to 3.5%).<\/p>\n

\u201cThis is a gradual, creeping higher risk rather than an expectation that the RBNZ is suddenly going to revise its neutral assumption by a significant clip in one go,\u201d Zollner said.<\/p>\n

\u201cNeutral is unobservable and slow-moving, but if it\u2019s higher than the RBNZ is assuming, OCR hikes to date will be getting less disinflationary traction.\u201d<\/p>\n

Despite getting a good coverage of its revision, ANZ isn\u2019t actually the most hawkish of the local economists.<\/p>\n

BNZ economists now expect sequential 25-basis-point hikes until the OCR reaches 3.75% in March 2027. That\u2019s a revision since BNZ\u2019s Toplis\u2019 more hawkish 4% call.<\/p>\n

The other major bank economists still have year-end forecasts.<\/p>\n

ASB expects increases in September, October and December, taking the OCR to 3.25%.<\/p>\n

Kiwibank and Westpac still just two more hikes, taking it to 3%.<\/p>\n

But with the way fuel prices are headed and the (hopefully) continued signs of economic recovery unfolding, it wouldn\u2019t be a surprise to see those forecasts revised up too.<\/p>\n

Too cheery?<\/p>\n

Was I too cheery last week?<\/p>\n

Auckland Chamber chief executive and former National Party leader Simon Bridges thought so.<\/p>\n

Bridges wrote a decidedly downbeat column<\/a> for the Herald calling out myself and Simplicity KiwiSaver chief Sam Stubbs for being a bit too upbeat about the recovery.<\/p>\n

It was a little surprising, because usually business leaders tell people like me to cheer up and say things like: too much negativity is self-fulfilling.<\/p>\n

There was nothing wrong with his take, to be fair. We need a range of views on the economic data we\u2019re staring at.<\/p>\n

But perhaps Bridges was right? I\u2019d be interested to hear what readers think.<\/p>\n

\"SimonSimon Bridges says the global situation has changed since the economic recovery under Sir John Key’s Government. Photo \/ NZME<\/p>\n

In my defence, beyond the tone of my headline, (\u201cConsumer gloom masks a recovery in the economy\u2019s engine room\u201d), I don\u2019t think my column<\/a> was that cheery.<\/p>\n

Bridges spent a lot of words worrying about the grim global situation \u2013 tariffs and war, mostly.<\/p>\n

I worry about those things too \u2013 there is a lot going on. I just don\u2019t see much point dwelling on things we can\u2019t control.<\/p>\n

He also said \u201ccan you really have an economic recovery while consumers, households and SMEs (probably the same people) don\u2019t feel it? I, for one, certainly doubt it\u201d.<\/p>\n

Well, quite. In my column, I said almost exactly the same thing.<\/p>\n

After dedicating the lead item to the latest downbeat consumer spending data, I said: \u201cI think as long as the consumer recovery is missing in action, we don\u2019t really have a recovery.\u201d<\/p>\n

Another take<\/p>\n

The other columnist Bridges took issue with, Stubbs (writing for Stuff), made the case that getting GDP growth of 0.2% in the second quarter with the property market basically stuffed (pardon the pun) was actually something to celebrate.<\/p>\n

\u201cIf I had told you 10 years ago that our property market had just fallen by 20%, but that the economy was still growing, you wouldn\u2019t have believed me,\u201d he wrote.<\/p>\n

I agree. There\u2019s no doubt in my mind that the big property slump in Auckland and Wellington has really dampened consumer confidence and slowed our recovery.<\/p>\n

Net migration is also at historical lows and when you throw in the oil price shock, the fact we didn\u2019t go backwards in the second quarter is something of a triumph.<\/p>\n

It\u2019s a tough line to take without minimising the pain that many small and medium businesses are going through, but it is possible we may see a stronger economy in the long term by going through this adjustment.<\/p>\n

The absence of soaring population growth and a booming property market is forcing this economy to sweat.<\/p>\n

Positive momentum <\/p>\n

The recovery is taking longer than anyone would like. The global forces keeping inflation elevated are entirely unwelcome.<\/p>\n

But most economists see the recovery continuing to gather momentum.<\/p>\n

A research note from BNZ this week made the case. Headlined \u201cPositive Momentum\u201d, it highlighted primary exports, investment, tourism and tourism as leading the recovery.<\/p>\n

It also ticked off higher net migration and a lift in job ads on the Seek website.<\/p>\n

The concerns raised by Bridges were covered; oil prices, higher inflation, subdued consumer spending and a depressed housing market.<\/p>\n

But ultimately, BNZ senior economist Doug Steel concluded it was all \u201cin line with our expectations and fits with our forecast of ongoing economic recovery\u201d.<\/p>\n

My internal struggle <\/p>\n

Point by point, there wasn\u2019t much I didn\u2019t agree with in Bridges\u2019 column.<\/p>\n

But I\u2019ll probably continue to retain an upbeat outlook.<\/p>\n

As regular readers will know, I try for an optimistic bias because that\u2019s the way most successful businesspeople (the ones I\u2019ve met) tend to see the world.<\/p>\n

It\u2019s a choice I make because my natural inclination leans towards the gloomy economist outlook \u2013 focusing on risk and the things that could go wrong.<\/p>\n

My tone does shift around week to week with events and data.<\/p>\n

I\u2019ve noticed a side effect of election year is that some people seem to think that any degree of optimism or pessimism coming from economists or commentators is evidence of political bias.<\/p>\n

I copped a bit of that in the comments section last week.<\/p>\n

I have opinions that have put me at odds with all the major parties over the years. These are mostly about policy to deal with New Zealand\u2019s larger structural challenges.<\/p>\n

When it comes to New Zealand\u2019s immediate fortunes, I always want to see the economy get better \u2013 regardless of timing or who that might favour politically.<\/p>\n

But rest assured, if and when bad things happen, I always want to be the first to report them.<\/p>\n

That\u2019s the news game.<\/p>\n

Don\u2019t forget to check out the Herald\u2019s new podcast, The Economy of Everything<\/a>, with Liam Dann and Tamsyn Parker \u2013 thanks to CMC Markets.<\/p>\n

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. <\/p>\n

He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz<\/a> and select \u201cMy newsletters\u201d. <\/p>\n

For a step-by-step guide, click here<\/a>. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz<\/a> or leave a message in the comments section.<\/p>\n","protected":false},"excerpt":{"rendered":"My understanding is that interest rate increases are designed to slow the economy and thereby slow inflation increases.…\n","protected":false},"author":2,"featured_media":902056,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[1466,64,63,16379,99,16377,16386,16369,16370,15261,5693,164,16368,1899,16378,125786,71949,16362,16371,16382,1460,4689,16373,16384,16385,16374,12536,44,16376,16380,16381,14825,154135,16387,16383,2951,16372,23180,470367,10965,320,14850,16375,16367,16363],"class_list":["post-902055","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-about","tag-au","tag-australia","tag-burning","tag-business","tag-click","tag-comments","tag-deeper","tag-dive","tag-economic","tag-economics","tag-economy","tag-every","tag-have","tag-here","tag-hiking","tag-if","tag-inside","tag-into","tag-intricacies","tag-is","tag-leave","tag-leftfield","tag-liamdannnzheraldconz","tag-message","tag-missed","tag-more","tag-news","tag-newsletter","tag-question","tag-quirks","tag-rates","tag-rbnz","tag-section","tag-send","tag-sign","tag-some","tag-still","tag-sucks","tag-take","tag-the","tag-week","tag-weekly","tag-welcome","tag-why"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/902055","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=902055"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/902055\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/902056"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=902055"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=902055"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=902055"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}