Currently consumer price inflation is high, both in New Zealand and globally. Inflation pressures are mostly due to the recent recovery in global demand running up against severe supply shortages and trade disruption. Rising energy and food prices resulting from the Russian invasion of Ukraine have added to the economic disruptions caused by the pandemic. Global consumer price inflation is well above most central banks' targets, not just here in New Zealand.
The RBNZ implements monetary policy by setting the Official Cash Rate (OCR) which is reviewed seven times a year.
The theory is that higher interest rates will encourage consumers to save rather than spend while lower interest rates will encourage consumers to spend either money they have — or money they are able to borrow at the lower rates.
On April 13, the RBNZ Monetary Policy Committee increased the Official Cash Rate by 0.50 per cent to 1.5 per cent.
At the time of this review, the committee discussed developments affecting the outlook for monetary policy. In their report they noted that "Capacity pressures are apparent across a wide range of domestic indicators. In particular labour shortages remain heightened, impinging on domestic economic output. Nominal wages are rising in response to these shortages, as would be expected.
However, the increasing cost of living is putting pressure on household budgets. Consumer confidence has been declining as domestic price pressures are outpacing nominal household income growth."
Rising costs are a problem globally, not just in New Zealand. Taking money out of household budgets by raising the OCR will send more people into poverty. Some may be forced to sell their homes if they can't service their mortgages when they are reset at much higher rates.
The RBNZ must balance the need to control inflation with the risks of putting too much pressure on households. They also have to be mindful that it may take months for the higher OCR to have the desired effect.
Your daughter may find that there are more houses in her price bracket once the interest rate rises have had time to work through the economy — this could take nine to 18 months.
You as an individual can't do much to influence the RBNZ's decisions, except save rather than spend on discretionary items. With the cost of everything from groceries to building supplies rising, many of us are tightening our belts now.
- •Shelley Hanna is the communications manager with Peak Portfolio Management Ltd which is a Financial Advice Provider licensed by the Financial Markets Authority. Disclosure information is available at www.peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to shelley.hanna@peak.net.nz