Inflation will not return to the Reserve Bank's target 1 to 3 percent band until mid-2025, an economics consultancy warns. Photo: 123rf
Stubbornly high inflation will require higher interest rates for longer even at the risk of squeezing the economy more tightly than desirable, according to a new report.
Economics consultancy Infometrics is forecasting inflation holding up at 6.6 percent by the end of the year, close to 4 percent at the end of next year, and not back inside the Reserve Bank's target 1 to 3 percent band until mid-2025.
Annual inflation has remained close to 32-year highs at 7.2 percent and shown few signs of easing amid high food, building and household costs.
Infometrics chief forecaster Gareth Kiernan said the impact of the floods and Cyclone Gabrielle would add to inflation pressures, offering the Reserve Bank no choice but to keep on with its high rates policy.
"Although the Reserve Bank can do little about these immediate pressures, they come at a time when pricing behaviour and inflation expectations have already been sustained at a high level for longer than expected.
"Domestic transport costs remain problematic for businesses and upward pressure on labour costs is still significant."
He said the RBNZ's 11 consecutive official cash rate increases since late 2021 had yet to be widely felt, with many households still yet to refix their fixed rate mortgages or being cushioned by savings accumulated during the lockdowns.
Kiernan said the central bank's most recent review was hawkish and he expected two further 25 basis point rises taking the OCR to a peak of 5.75 percent over the next few months.
He also disputed the views of some forecasters that the RBNZ was in danger of raising rates too much and causing more damage to the economy.
"We do not believe the Reserve Bank is overdoing the slowdown.
"Insipid growth is needed to correct the imbalances that have manifested themselves across a wide range of indicators, from the housing market, to the current account deficit, and inflation outcomes."
Kiernan expected the economy to be in recession for much of this year, and with it would come a rise in unemployment toward 5 percent over the next year, although rising migration gains would ease some labour market pressures.