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New Zealand is set to raise interest rates this week, the first advanced economy in the Asia-Pacific to begin normalizing policy, as a powerful recovery unhindered by delta outbreaks shows signs of overheating.
The Reserve Bank of New Zealand will lift the official cash rate by a quarter percentage point to 0.5% at its review Wednesday in Wellington, according to 13 of 17 analysts surveyed by Bloomberg. One economist predicts a half-point increase and three see no change. Markets also expect a hike as concerns mount that labor shortages will unleash wage-push inflation.
“It is clear the New Zealand economy no longer requires extreme monetary stimulus,” said Sharon Zollner, chief economist at ANZ Bank New Zealand in Auckland. “Signs of overheating are evident across the board, and the risks of a boom-bust cycle are high and rising.”
Governor Adrian Orr unexpectedly ended quantitative easing in July, a sign that the RBNZ was already concerned about the potential for overheating from its stimulus settings. Since then unemployment has tumbled to 4% and private wage gains have surged to a 13-year high.
New Zealand is set to be first to move in the region, ahead of the Bank of Korea, which has flagged its commitment to normalize policy in the coming months. The BOK meets next week, with a possible rate rise on the agenda.
The RBNZ Monetary Policy Committee, chaired by Orr, releases its decision at 2 p.m. in Wellington. The central bank will also publish a quarterly monetary policy statement, including new forecasts, and Orr will hold a press conference at 3 p.m.
Most economists expect Wednesday’s move to be the first in a series of rate hikes. Investors agree, fully pricing in a quarter-point increase this week and a 70% likelihood of the OCR reaching 1% by year’s end.
Higher borrowing costs would potentially ease pressure on policy makers to rein in house prices, which soared 31% in the year through July. The RBNZ doesn’t target the property market, but it is required to assess the effect of its decisions on the government’s policy to support more sustainable house prices.
New Zealand has managed to successfully eliminate the coronavirus from the community, in large part by acting early to close its border to most foreigners and requiring citizens returning home to undergo quarantine. Its virus-free status contrasts with much of Asia, where the delta variant is exposing the limitations of other nations’ “Covid zero” policies and highlighting sluggish vaccine rollouts.
This is particularly so across the Tasman Sea, where Sydney and Melbourne are under stay-at-home orders and rolling lockdowns have been imposed along the east coast, Australia’s most populated area. Its economy is expected to contract in the current quarter.
New Zealand’s tough border policy has also shut out migrant workers, creating labor shortages, and as a result the economy is running hot as demand surges.
Yet considerable risks remain. Like much of the region, a slow vaccination roll-out has left New Zealand vulnerable should Covid-19 breach its defenses, pushing it off the top of the Bloomberg Covid Resilience Ranking.
Prime Minister Jacinda Ardern last week announced an acceleration of the inoculation program, citing the risks from the delta variant. She is targeting a phased reopening of the border from the first quarter of 2022.
Still, New Zealand’s strategy has given its recovery a head-start. While a smattering of central banks — from Iceland to Chile — have raised borrowing costs in recent months, most of New Zealand’s developed-market peers remain cautious. Canada has signaled its rate will stay as low as possible until the second half of 2022 and Australia doesn’t expect to raise rates before 2024.
Economists tip New Zealand’s jobless rate could drop toward 3.5% next year as labor shortages become more acute. Inflation last quarter surged to 3.3% — the first time it has exceeded the RBNZ’s 1-3% target since 2011. A report last week showed inflation expectations increased to a seven-year high.
“The RBNZ’s inflation and maximum sustainable employment targets have been met and look to stay met for the foreseeable future,” Bank of New Zealand Head of Research Stephen Toplis said. “All the above says get to neutral as fast as possible.”
MONCTON – Dialogue NB CEO Nadine Duguay-Lemay says the business community has an integral place in a conversation about building a more equal and just New Brunswick.
That very conversation will take place on September 27 in Moncton with Dialogue Day 2021.
“When we talk about anti-racism, notions of equality, diversity, acceptance and inclusion and all those notions we celebrate, it’s not something we can do on our own,” said Duguay-Lemay.
“The business community actively needs to participate, if anything, because those topics concern them. That’s why you see so many business support the event.”
The volunteer-led non-profit organization plans to host an inclusive conversation on Monday at Moncton’s Crowne Plaza and virtually, online.
Dedicated to building social cohesion in New Brunswick, the sold-out event will feature discussions about racial justice in the workplace, rethinking the economy as it recovers from the pandemic and how to be a better ally to Indigenous people.
The event, which has sold out of in-person seats, will feature Jeremy Dutcher, a Wolastoq singer, songwriter, composer, musicologist and activist from Tobique First Nation, as its keynote speaker.
The mandate of the discussions is to ensure everyone feels heard, valued and that they belong, making diversity an asset – something Duguay-Lemay considers imperative to a functional economy.
“What I’ve found is that people don’t like to go into uncomfortable discussions. Some people want to embrace social cohesion but don’t know where to start, or are afraid of saying the wrong thing. This is our expertise – we’re good at the art of dialogue and multiple viewpoints at one table,” she said.
“We need a lot of different voices and perspectives at the table to rethink the system for the wellbeing of all. These discussions shouldn’t be happening in isolation.”
Duguay-Lemay said New Brunswick faces many economic challenges, noting a diverse workforce will help recover from those challenges.
She stressed that the business community needs to work toward a goal of truth and reconciliation, and in a call with Huddle, rebutted the metaphor of everyone being on the same boat during the pandemic.
“I’d argue we’re all facing the same storm, but not in the same boat. Some people are in yachts and some are in little boats about to capsize,” she said.
Other voices are emerging – female and Indigenous, for example – looking to address poverty and wage inequality and unfairness, employment access, systemic racism and environmental degradation, noted Duguay-Lemay, adding that the province’s 4,418 non-profits need more recognition as an economic partner.
“Inclusion is embedded in our DNA as Canadians. We’re already a country and province that abides by those laws, so it’s important to look at inclusion,” she said.
The conversations will also focus on racial justice in the workplace, how the pandemic hurt Indigenous and black Canadian employment, versus non-minorities, access to employment – and the social barriers that exist for racialized workers.
“I invite all organizations, employers, public and non-profits to look at their practices in place and ask if they walk the talk for truth and reconciliation. We’re all treaty people – how do we uphold this?” said Duguay-Lemay.
“We want to at least demonstrate to Indigenous people in New Brunswick that we hear their plight and are serious about truth and reconciliation.”
Greater social cohesion is the best step forward, Duguay-Lemay noted, adding that real dialogue can build an economy that works for everyone.
She said matters of racial justice in the workplace – and specific matters, such as owners objecting to the declaration of September 30 as a statutory holiday, contending that they can’t afford it – will be among the economic issues for which solutions will be sought.
The conversation will also focus on how the province’s recovery from the pandemic has exposed inequalities in the economy.
Duguay-Lemay stressed the need to learn from the way the pandemic exposed inequalities, and rethink a system that works for everyone.
“We need to think differently and it really shouldn’t be based on the interests of the privileged,” said Duguay-Lemay.
“As employers are looking to attract and retain talent, we hear about skill shortages all the time. This becomes a matter of attracting talent, whether from newcomers or tapping into Indigenous communities, how can we make our workplaces more equitable and inclusive?
The event will feature an “eclectic” round table of specialists, artists, activists and experts from numerous sectors, and identities in New Brunswick, with opportunities for networking, inspiration for change with concrete examples and skills to help become a social leader.
Kenneth Rogoff, a former chief economist of the International Monetary Fund, is professor of economics and public policy at Harvard University.
With the disastrous U.S. exit from Afghanistan, the parallels between the 2020s and the 1970s just keep growing. Has a sustained period of high inflation just become much more likely? Until recently, I would have said the odds were clearly against it. Now, I am not so sure, especially looking ahead a few years.
Many economists seem to view inflation as a purely technocratic problem, and most central bankers would like to believe that. In fact, the roots of sustained inflation mainly stem from political economy problems, and here the long list of similarities between the 1970s and today is unsettling.
In the United States, following a period in which the president challenges institutional norms (Richard Nixon was the 1970s version), a thoroughly decent person takes office (back then, Jimmy Carter). Abroad, the U.S. suffers a humiliating defeat at the hands of a much weaker, but much more determined adversary (North Vietnam in the 1970s, the Taliban today).
On the economic front, the global economy suffers a lingering productivity slowdown. According to the Northwestern University economist Robert Gordon’s magisterial account of innovation and growth, The Rise and Fall of American Growth, the 1970s marks a turning point in U.S. economic history, thanks to a sharp slowdown in meaningful economic innovation. Today, even if productivity pessimists grossly underestimate the phenomenal gains the next generation of biotech and artificial intelligence will bring, a large body of work finds that productivity growth has been slowing in the twenty-first century, and now the pandemic looks to be inflicting another heavy blow.
The global economy suffered a massive supply shock in the 1970s, as Middle East countries massively hiked the price of oil they charged the rest of the world. Today, protectionism and a retreat from global supply chains constitute an equally consequential negative supply shock.
Finally, in the late 1960s and 1970s, huge increases in government spending were not matched by higher taxes on the wealthy. The spending increases stemmed in part from president Lyndon Johnson’s “Great Society” programs in the 1960s, later amplified by the soaring cost of the Vietnam War. In recent years, first the Trump tax cuts, then pandemic-related catastrophe relief, and now progressive plans to expand the social safety net have hit the federal budget hard. Plans to fund these costs by raising taxes only on the rich will likely fall far short.
It is true that despite all these similarities, today’s independent central banks stand as a bulwark against inflation, ready to raise interest rates if inflation pressures seem to be getting out of hand. In the 1970s, only a few countries had independent central banks, and in the case of the U.S., it did not act like one, fuelling inflation with massive monetary expansion. Today, relatively independent central banks are the norm across much of the world. It is also true that today’s ultralow global real interest rates provide rich-country governments a lot more room to run deficits than they had in the 1970s.
On the other hand, the challenges of providing for aging populations has become vastly more difficult over the past five decades (at least in advanced economies and China). Underfunded public pension schemes arguably are a much larger threat quantitatively to government budget solvency than debt. At the same time, social pressures to increase government spending and transfers have exploded across the world, as inequality becomes more politically salient for many countries, and improving growth less so. And confronting climate change and other environmental threats will almost certainly put additional pressure on budgets and slow growth.
Sharply rising government debts will inevitably make it more politically painful for central banks to raise nominal interest rates if global real rates start turning upward. High debts are already a reason why some central banks today will hesitate to raise interest rates if and when postpandemic normalization occurs. Private debt, which has also soared during the pandemic, is perhaps an even bigger problem. Widespread private defaults would eventually have a huge fiscal impact via lower tax collection and higher social safety net costs.
Today’s economic challenges are certainly solvable, and there is no reason why inflation should have to spike. Leading central bankers today such as Jay Powell of the U.S. Federal Reserve and Christine Lagarde of the European Central Bank are a far cry from pliable Fed Chair Arthur Burns in the 1970s. They both have superb staffs to support them. Yet all central banks still face constant pressures, and it is hard for them to stand alone indefinitely, especially if politicians become weak and desperate.
America’s humbling defeat in Afghanistan is a big step toward recreating the perfect storm that led to slow growth and very high inflation of the 1970s. A few weeks ago, a little inflation seemed like a manageable problem. Now, the risks and the stakes are higher.
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