In the face of rising prices, interest rates squeeze more from pockets. How and why would the central bank(RBNZ) have a mandate to do this?
How will higher rates help?
These relentless moves upwards feel counterintuitive to a household. Generally the theory is that inflation is a sign that the value of money is decreasing, as there is more spent. Higher interest rates will have a dampening effect on spending, through a higher cost of borrowing and a better return for building up savings.
Where the pain felt seems unfair is when we see a lot of tradable inflation, where in effect we are spending money on exports(petrol). Especially where there might not be a lot of room for adjustment. Here again a higher interest rate can give some upward pressure on the strength on the NZ dollar which in affect assists in importing.
Any silver lining?
The other vital aspect is the higher our interest rate is before the next crisis the more we have in the bag to weather a storm. It is understandable when it can feel like a self fulfilling prophecy. However the RBNZ has a target or ensuring that the value of money does not slide too quickly downwards, less than 2% over the mid term is a worry. Close to 7% inflation, basically means the value of money is going down along with the value of debt, at somewhere around that rate. Initially for most home owners the easy cashflow gets tightened through higher interest rates, however over the long term the mortgage weighs less through the change in the value of money.
