Inflation war will be won but at what cost?

The high inflation war will be won, says Kiwibank economists Jarrod Kerr, Mary Jo Vergara and Sabrina Delgado. “It’s just a matter of assessing the cost, or economic damage, of the war,” Kerr says.

Kiwibank says the RBNZ’s plan is simple: lift interest rates to a point where they hurt, and hurt a lot, and then wait for inflation to be stifled and restrained to something more stable, like 2%.

The economists say although households and businesses are feeling the pinch, the RBNZ wants to see the full force of rapid rate rises over the past 18 months. And it expects further falls in economic activity.

“To tame the prickly inflation beast, monetary policy needs to be left at restrictive levels, for longer. The RBNZ notes ‘a prolonged period of subdued activity is required to reduce inflationary pressure.’ Talk of upside risks near-term, mainly on inflation, give way to bigger downside risks over the medium term”, Kerr says.