Economists, by nature or nurture, are like living and breathing versions of the Picasso paintings that show both sides of a solitary image. So well-known is their use of the phrase “on one hand … but on the other hand,” that President Harry Truman once famously asked for a one-armed economist to provide him with economic counsel.
With that caveat, New Zealand is I think a Petrie dish for how tight monetary policy plays out. The Reserve Bank of New Zealand started lifting rates earlier than other central banks last year and are set on more rises ahead.
Now according to a Reuters poll, New Zealand’s house prices are forecast to fall 10% this year and 5% next as aggressive interest rate hikes take some heat out of a blazing housing market, but not enough to solve the ongoing affordability crisis. And while the Reserve Bank in New Zealand does need to take home price movements into consideration when making interest rate calls, it seems to me that the objective of snuffing out inflation is number one, two and three, and to that end, if higher unemployment, or lower home prices are a necessary consequence then so be it.
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