The Reserve Bank is walking a "delicate path" as businesses grow increasingly concerned about demand while inflation remains stubborn, a financial expert says.
Inflation is falling but slowly and domestic inflation is proving increasingly hard to shift. In response to rising inflation post-COVID the Reserve Bank of New Zealand (RBNZ) hiked interest rates. But now after a sustained period of high mortgage costs, businesses are concerned over a lack of demand.
Forsyth Barr's latest business survey shows a drop in demand is now the main concern for businesses instead of labour shortages or price inflation.
But it's not all bad news, the survey also found business confidence has changed from an extremely negative position to a largely neutral one.
Milford Asset Management Portfolio Manager Frances Sweetman told AM the drop in demand is what the RBNZ wanted, but it's now in a delicate position because of how sticky inflation is proving to be.
She added the survey results were a mixture of positive and negative but there is some good news more broadly.
"Companies were saying finally after a couple of years of really struggling with labour shortages and cost inflation that now actually what they're worried about is demand," Sweetman told AM co-host Lloyd Burr.
"That is a signal that consumers are doing it tough. We know consumers doing it a lot tougher than they have been for several years and those high mortgage rates are starting to bite."
But she said businesses having a more optimistic outlook broadly reflects how the country is moving through this economic cycle.
"We are now coming to the point where mortgage rates have been really high in New Zealand for quite some time, that demand is starting to drop, that's what we need to see for interest rates to be cut and for the RBNZ to stimulate the economy again."
"This is exactly what the RBNZ needs to see. They're walking a really delicate path and fortunately, it's gone really well. I mean we had the most rapid rise in interest rates that we've seen in modern economic history and that's the only tool that they've got to try and dampen down that huge economic boom and all that inflation that we are experiencing," she said.
Sweetman said overall dropping demand is a "good thing" but that doesn't mean it's not painful.
"This is what needs to happen but that doesn't mean that it's great for consumers, particularly those with a mortgage."
But Sweetman said the market is expecting Official Cash Rate cuts later this year and then again early next year.
Although she warned there are still areas of the economy, such as utilities, where inflation is still really high which makes it more complicated.
Watch the full interview above.
