14 Oct 2022

Demand needs to be 'reined in' to curb inflation - economist

8:47 am on 14 October 2022
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There has been excessive spending in Aotearoa over the past two years, Infometrics chief forecaster says. Photo: 123rf

An economist says growth will need to be "stunted" for two years in order to get inflation back under control.

Economic consultancy Infometrics is forecasting the country's official cash rate hitting 4.5 percent early 2023, as the Reserve Bank battles high inflation.

Infometrics chief forecaster Gareth Kiernan said demand needed to be "reined in" to improve stretched resources across the economy.

03082016 Photo: Rebekah Parsons-King. Gareth Kiernan, Economist

Gareth Kiernan. Photo: RNZ / Rebekah Parsons-King

"The effects of skills shortages and supply chain disruptions have been amplified by excessive spending over the last two years, and inflation is set to persist outside the Reserve Bank's target band until the end of 2024.

"Wage and pricing pressures will only ease when demand softens, and businesses have to compete harder to make sales," Kiernan said.

Infometrics said the next couple of years would be uncomfortable for households.

It said house prices have already fallen 12 percent from their peak in late 2021 and they were expected to remain under downward pressure throughout 2023.

Mortgage rates have been rising towards 6.5 percent by the middle of 2023, which would further limit the amount of debt buyers could take on, Kiernan said.

"Those sorts of mortgage rates will be placing pressure on household budgets, particularly for people who bought into the housing market at the peak of the boom in 2021," he said.

Rising interest rates also meant mortgagee sales would become an increasing risk.

Infometrics said the unemployment rate would also push up to 4.2 percent by March 2024, and climb to about 5 percent by mid-2026 - equal to a jump of about 60,000 people in the number of unemployed.

Kiernan said it was likely to be caused by sluggish growth in job numbers, instead of mass job cuts by employers.

Export incomes have also been under pressure from softening global demand and falling commodity prices, he said.

"These headwinds mean that agriculturally focused regions, which performed so strongly during the Covid-19 pandemic, will not enjoy such vigorous growth."

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