National leader Christopher Luxon on the OCR and inflation. Video / Mark Mitchell
Mortgage rates and day-to-day cost of living are top of many Kiwis’ minds after the Official Cash Rate rise this week, but travel is likely to be affected as well.
According to one expert, the demand and cost of travel in New Zealand isn’t set to ease anytime soon, after the Monetary Policy Committee’s decision to increase the Official Cash Rate (OCR) from 3.5 per cent to 4.25 per cent in an effort to control inflation.
New Zealand’s tourism industry appears to have been a contributing factor. The Reserve Bank of New Zealand said the “stronger than expected rebound in tourism” would be an important contributor to the economy, but could cause inflationary issues by overwhelming the still-recovering industry.
“Short-term visitor arrivals, international card spending data, and information gathered from recent business visits indicate that tourism spending will make a strong contribution to economic activity in coming months,” the bank said.
“However, some members noted that ongoing capacity constraints could, at some point, inhibit the tourism recovery and add to overall inflation pressures.”
The committee said transport, hospitality and accommodation sectors would likely struggle to meet demand over summer because of labour shortages.
Travel may become harder to afford
If you have a mortgage, it may be harder to set aside money for travel according to independent economist Benje Patterson, who said the rise in the OCR could increase people’s mortgage payments by tens of thousands of dollars.
“People have to make compromises in life to pay for that, you can’t hide from your mortgage,” he said. “So, people will cut back on their discretionary expenditure to make ends meet.”
Travel, Patterson said, is one of those expenditures.
Arrowtown-based independent economist Benje Patterson. Photo / Supplied via Otago Daily Times
This doesn’t mean travellers will abandon planned trips altogether, Patterson clarified, but rather, they will adjust things to make them less expensive.
“Rather than going away for the fancy trip or the one that is a week, they might pare it back a little and slightly downgrade the type of accommodation they stay in,” he said.
“They might go for a slightly shorter period of time or they might choose to travel slightly closer to home”.
Flight Centre’s general manager of products Victoria Courtney agreed demand for leisure travel may drop but would still be a priority for many.
“Kiwis do see travel as a necessity rather than a luxury, so we traditionally see this being prioritised,” she said.
Will a drop in demand result in a drop in price?
Typically, a drop in demand for goods or services is followed by a drop in prices. Unfortunately, this isn’t likely to be the case for travel in New Zealand, for two reasons.
Firstly, even if demand eases among domestic travellers, many international visitors are eager to travel and spend.
“We’ve just re-established linkages back to the rest of the world and people globally have been seeing New Zealand over recent years, desperately wanting to get here and suddenly they’ve got this opportunity to do it,” Patterson said.
Auckland Airport has bounced back strongly from the pandemic. Photo / NZME
Since Australia is also experiencing high inflation, Patterson said this could encourage them to trade their big long-haul holidays for trips to New Zealand.
The RBNZ stated international tourist arrivals had “increased considerably” since border restrictions eased, adding that this pent-up demand combined with limited capacity meant, if anything, there would be “significant price increases” for things like accommodation and transport.
“We’re not probably in a situation where visitor operators and tourism operators are going to see a massive curtailing of demand where they have to chase customers with price,” said Patterson. “At least, not over the summer season.”
A second reason prices will likely remain steady or increase is that inflation has increased operating costs for businesses.
High prices at restaurants, tour companies and hotels are less a result of high demand, Patterson explained, but rather higher-than-usual costs for wage bills, food and fuel.
“They’re going to be somewhat limited in how steeply they can discount because they still need to make a profit to remain in business.”
When the OCR rises, New Zealand’s dollar tends to become “stronger” compared to other currencies.
“What that means is that it’s cheaper for us to travel abroad; our money will go further,” said Patterson but he added that, in the grand scheme of things, any savings to household budgets as a result were far outstripped by the increase in mortgage payments.
Your money may get more overseas but won't be likely to result in significant savings. Photo / Ilir Tsouko
Advice for travellers
If you’re determined to travel despite rising costs and tightening budgets, Flight Centre’s Courtney said her top piece of advice was to mark mid-2023 in the diary.
“Keep an eye out for deals on fares for mid-next year, which coincides with the Northern Hemisphere summer,” she said.
“Airlines may offer tactical flight deals ahead of time to help to fill the seats with a predicted incoming recession.”
