OPINION: One of the main causes of car accidents is “overcorrection”.

It is too easy to imagine the scenario.

A driver loses his concentration, panics when he realizes that he has drifted to the left and suddenly pulls on the steering wheel.

Some would argue that the Reserve Bank fell asleep last year when it was – at least in hindsight – slow to react to growing signs of inflationary pressures.

Arguably, the central bank should have started raising the official exchange rate on August 18 when it instead opted to delay due to the confirmation of the Delta outbreak that day.

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It could have easily justified a 50 basis point hike in November, when it instead decided to take it slow and steady by increasing the OCR by 25 basis points, a call that Infometrics economist Brad Olsen called it spinless.

Now, with inflation expected to climb to 7% or 8% this year, some pundits have been yelling at the Reserve Bank to raise rates much more aggressively.

ANZ expects “back-to-back” 50 basis point hikes on Wednesday next week and again on May 25, which would double the OCR to 2%.

But there is currently a wide range of opinions among economists about how interest rates might rise and how fast.

“Overcorrection” is a known danger for drivers and central banks.

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“Overcorrection” is a known danger for drivers and central banks.

While New Zealand’s economy has weathered the Covid pandemic better than almost anyone expected, there are now many warning signs flashing at home and abroad.

A housing correction finally appears to be underway with house prices falling 3% over the past three months and many banks forecasting the price decline to accelerate into double digits.

Consumer and business confidence has plummeted, with an ANZ survey placing consumer confidence at its lowest since at least 2004 and a Westpac survey at its lowest since 2008.

On top of that, New Zealand is increasingly expected to see strong net emigration in the coming months, with Kiwibank forecasting a global exodus of 20,000 people this year.

Confidence in the labor market seems to be holding up, but the question is, for how long?

Infometrics economist Andrew Beattie notes that job growth appears to have stopped accelerating, with Stats NZ reporting that the number of people in employment fell 0.3% in February.

“The job growth we’ve seen through 2021 was never going to be sustainable, and employment is showing signs of plateauing due to tight labor markets,” Beattie said.

Reserve Bank Governor Adrian Orr appears to be caught between a rock and a hard place, with inflation rising as confidence plummets.

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Reserve Bank Governor Adrian Orr appears to be caught between a rock and a hard place, with inflation rising as confidence plummets.

The international situation borders on surrealism.

Vladimir Putin uses nuclear threats to protect himself as he attempts to bomb and bomb a great democracy in the heart of Europe.

Banks, including Goldman Sachs, are beginning to talk about the prospects of Europe and the United States falling into recession in the coming year.

ANZ chief economist Sharon Zollner believes the Reserve Bank “simply has no choice but to keep rising” given the strength of domestic inflation.

This is probably true, but the question remains “how fast?”

Westpac stresses that there are no easy answers on how central banks should handle the unfolding scenario.

The Reserve Bank is supposed to keep inflation between 1 and 3% on average over the “medium term”.

But, being realistic, this will never happen at any cost and cannot be entirely under his control, especially now that he has competing dual mandates.

A period of high inflation and/or sharp declines in house prices and equity prices was always going to be needed to deflate the asset price bubble.

“The inflation targeting framework has served the economy well over the years. Indeed, one of its great successes has been that most of the time we just don’t need to think about inflation in our day-to-day business,” Westpac notes.

“But this framework is centered on managing demand-driven inflationary pressures,” he said.

“What we are currently experiencing is a combination of local inflationary pressures and a series of cost shocks from abroad, with the risk that the latter could spill over to the former.”

Westpac argues that in the case of inflation caused, for example, by rising oil prices rather than overheated demand, “it would appear that the central bank’s response is not to jump back and forth.” .

In the context of current monetary settings, this may mean that the Reserve Bank stays on its path of frequent 25 basis point rate hikes and prays that the economic wheels stay on the tarmac.

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