Q&A: In A Hurry “To Watch, Worry & Wait”, Outsized Hikes Not Ruled Out

The emphasis of the Q&A in the RBNZ’s press conference was around getting inflation and inflation expectations down. When asked whether the committee could hike by 75bp again, Governor Orr didn’t rule it out but said that they were in a hurry to get to a position “to watch, worry & wait” re inflation developments and they would assess the data at the February meeting. He reiterated that rates need to be higher sooner.

• Rates needed to be tightened as much as they have been because the starting point was so low and well below neutral. Neutral is probably also higher than they thought, as monetary conditions don’t seem as contractionary and there hasn’t been the same pass through to mortgage rates.
• The RBNZ is now closer to the end than the beginning. More time was spent discussing 75 vs 100bp than 50 vs 75bp. Given the amount of tightening not yet passed on, the committee decided on 75bp.
• The next few quarters will be key for inflation. Orr said that about half of inflation is home grown which is too much. The best way to return to price stability is anchoring price and wage expectations. He stated that monetary policy is in the hands of price and wage setters.
• Demand growth needs to be brought back into balance with supply to bring down inflation. He recommended that people save more and spend less to help with this process. He noted that current activity is at a very high level and that even with a shallow recession (Q2:23 -0.5%, Q3:23 -0.3%) it will remain robust.
• Labour market indicators are broadly close or at record levels and firms can’t meet demand due to input and labour shortages.