New Zealand

Abstract

Like in many other advanced economies, New Zealand’s inflation has accelerated recently, reaching 6.9 percent in 2022Q1 , well above the Reserve Bank of New Zealand’s inflation target range. Our empirical analysis finds that the recent surge in inflation is driven by both global and domestic factors, with global factors such as supply disruptions playing a larger role recently. At the same time, inflation for cyclically sensitive items increased recently, confirming the country’s strong cyclical position and justifying continued monetary tightening. Going forward, inflation is expected to remain elevated in the near term and slow down toward the target range after that. That said, high uncertainty remains as commodity prices have been volatile, and inflation expectations can react to upward surprises to inflation. Monetary policy should adjust the pace of tightening in response to evolving conditions, and the central banks’ clear communication is paramount to anchor inflation expectations. effect population with inelastic supply. The housing market is now turning given that many of these factors are reversing, in part due to recent policy actions, but the extent of moderation remains uncertain. Rising mortgage rates are set to further dent affordability and make borrowers vulnerable to mortgage repricing risks, but financial stability risks from the housing market would likely be manageable as banks are well capitalized. Policy should focus on increasing supply and ensuring affordability, including through the provision of public social housing. Macroprudential policy with the evolution housing cycle and financial stability while planned expansion of the macroprudential toolkit may useful for