MNI INTERVIEW: RBNZ Interest Rate Path "Uncertain"-Official

A senior Reserve Bank of New Zealand official has said there continues to be “uncertainty” around the central bank’s forecast track for interest rates, which the RBNZ believes are set to peak at 3.9% at the end of 2023.

Adam Richardson, the manager of central bank analytics and a new member of the RBNZ’s Monetary Policy Committee, told MNI in an interview that the global economic situation contained a “small chance of some large downside risks” which could have a greater than expected impact on the NZ economy and interest rates.

“What we’ve done is raised the outlook for the overall official interest rate and front load those hikes to ensure that inflation expectations start to come down,” Richardson said.

“So, for me it a balanced outlook but you probably do have a bit of asymmetry with the downside risks.”

SECOND 50BPS HIKE

At its May meeting the RBNZ hiked rates by 50 basis points, the second consecutive such hike, to 2.0% and released a forecast track for the OCR which had the rate reaching 3.4% by the end of the year, significantly higher than the forecast of 2.2% in February, (See MNI STATE OF PLAY: RBNZ Wants 'Least Regrets" On Policy Views).

The central bank was responding to surging inflation, which reached 6.9% in the first quarter of 2022. The RBNZ is now forecasting inflation will fall to 4.1% by the end of the year and to 2.6% by June 2023, back inside the target of 1% to 3%.

Richardson said the rate hikes, which began in October last year, were already having an impact on mortgage rates and consumer spending trends.

“Interest rates are only just reaching close to neutral levels, so we are only now beginning to put our foot on the brakes, and it does take some time to come through,” he said.

“Our research shows it will take a year to 18 months in terms of the actions we took last week to have an impact on the economy, so it’ll take some time to filter through.”

ECONOMIC SLOWDOWN

Richardson conceded that the outlook was “relatively subdued” for the NZ consumer sector, but this was necessary to control inflation now.

“We’ve got for a ‘stitch in time’ approach to get on top of inflation, and that means we’ll have to do less later with interest rates,” he said, (See MNI INTERVIEW: NZ Risks Hard Landing, Ex-RBNZ Official).

On the NZD, which has fallen from 72 US cents a year ago to 65 US cents this week, Richardson said that while it may have played more of a “shock absorber” role in the past, the current environment was a global one and there was “nothing unusual” in the recent moves in the currency.

He said that the re-opening of the NZ economy, which was likely to see net arrivals increase, would put some downward pressure on wage inflation although it may also add to housing demand.