More Hikes Ahead But RBNZ Now In More Flexible Position

RBNZ Governor Orr made very clear during the press conference that demand is significantly above supply and that further rate hikes are needed to bring them back in line and thus reduce inflation back to target. “Inflation is no one’s friend.” But he said that monetary policy is now restrictive and so the RBNZ is now in a more flexible position and has the time to assess developments. Thus another step down to 25bp at the next meeting is likely.

• The RBNZ continues to keep all its options on the meeting table and will do so again in April. In February the focus was on 50bp or 75bp with very little time spent on 25bp, as the economy was evolving before the storms as the Committee had expected in November. The discussion was heavily focussed on 50bp rather than 75bp due to early signs of inflation easing.
• Inflation peaked in Q4 2022 but with the expected price spike of some items following the floods, it is now not projected to ease until Q2 2023. The RBNZ is hoping these spikes will be short lived. The CPI should be below the top of the band by Q3 2024, about a year earlier than Australia.
• There were numerous questions around the economic impact of recent weather. Currently it is expected to add 1pp to GDP over time but this will be fined tuned as more information is available. Wages could definitely rise as a result due to the increased demand for labour to rebuild. Orr was concerned that the economy was very constrained before the disaster and that the situation is now worse. Resources need to be shifted to where they are needed. He said that fiscal policy was more suited to solving this crisis than monetary policy.
• Governor Orr noted that deposit rates are not rising as quickly as mortgage rates and that it is important that banks increase them as that will increase savings and take liquidity out of the economy.
• The Committee didn’t see increased migration as a solution to inflation, as it may help with labour supply but will also increase demand.