New Zealand housing prices unsustainable, inflation a challenge-IMF

WELLINGTON, May 14 (Reuters) - New Zealand's housing prices are unsustainable and should fall by around 10% this year, the International Monetary Fund said on Saturday, adding that the country's central bank had done the right thing by aggressively raising interest rates to rein in surging inflation.

The Reserve Bank of New Zealand (RBNZ) has raised its cash rate at four consecutive meetings since late last year to contain inflation, lifting it by a cumulative 125 basis points to 1.50% and signalling further increases to come.

"That is certainly the right medicine," Harald Finger, the IMF's New Zealand division chief, told Reuters.

New Zealand's headline inflation rate hit a three-decade high of 6.9% in the first quarter of 2022.

Finger said the challenge was finding the "sweet spot" where interest rates have increased but the economy wasn't derailed.

In its annual review of the New Zealand economy, released on the Saturday, the IMF forecast inflation would remain above the RBNZ's bank's target band of 1% to 3% in 2022 and 2023, although it would ease from current highs.

The IMF forecast economic growth to slow to about 2.7% in 2022 from 5.6% in 2021.

Finger echoed the RBNZ's assessment that housing prices, which have eased slightly in recent months, were still at unsustainable levels.

He said the IMF was expecting to see about a 10% decline in house prices in 2022.

Given that would effectively retrace the gains made last year, the IMF didn't see it destabilising the wider economy but acknowledged it would be tougher for some.

"Of course it might be difficult for some people who have entered the market really late," Finger said.

Early this month, Finance Minister Grant Robertson set a net debt ceiling of 30% of gross domestic product (GDP), and said the way debt was measured would be changed to bring it more it more in line with international norms.

Finger said New Zealand's debt burden was sustainable and well below its ceiling, and said the IMF was comfortable with the fiscal targets. (Reporting by Lucy Craymer; Editing by Kim Coghill)