MNI BRIEF: RBNZ's Conway Says Welcome Signs Demand Is Slowing

Reserve Bank of New Zealand chief economist Paul Conway said there were pleasing signs demand was slowing and 450bp of tightening was having the desired contractionary effect in a speech on Thursday.

"On balance, our measures of neutral interest rates - the interest rate that is neither stimulatory nor contractionary - indicate the OCR is now comfortably above neutral and having the desired contractionary effect. Consistent with this, and as discussed in detail in the February Monetary Policy Statement, there are welcome signs demand in the economy is slowing," he said.

Conway said it was unclear whether inflation expectations were falling fast enough to mean current and projected OCR settings are consistent with positive real interest rates, and thus likely to be disinflationary.

The RBNZ raised the Official Cash Rate 50bp to 4.75% on February 22. Overnight indexed swaps have not fully priced in a 25bp hike for the April 5 meeting, pricing in 4.94%. (BONDS : NZGBS: Near Bests As RBNZ Conway Speaks)

Conway said the effects of 450bp in hikes were still percolating through the economy. He said 50% of mortgages will roll off fixed-term rates onto much higher rates, lifting the average rate from 4.5% to over 6%.

"We assume this will affect consumer spending in a similar way to interest rate increases in previous cycles. But the rapid speed of rate increases creates additional uncertainty about how the effects of the tightening will play out."