Rates Close To Peak But RBNZ Remains “Determined” To Reduce Inflation

RBNZ chief economist and MPC member Conroy spoke today on “The Path Back to Low Inflation in New Zealand”. He warned about the damaging effects of high inflation and stated that it remains too high in NZ. He cautioned that the RBNZ will need to hike more to return inflation to target if inflation expectations are elevated and businesses and workers try to push up their real profit margins and wages as a result. The RBNZ remains “incredibly determined” to reduce inflation and expectations back to its target. It is likely that rates are close to their peak but still have further to rise and may stay there for longer.

• Conway noted the significant uncertainty surrounding current policy making from global factors, natural disasters, mortgage refis and the “rapid speed of rate increases”. He said that the OCR is now “near the interest rate peak” and “comfortably above neutral” and having a contractionary effect but the full effects are not yet being felt. He noted that 50% of mortgages will be refinanced at higher rates over the coming year and that the “average” mortgage rate will rise to 6% from 4.5%.
• The RBNZ still expects a “mild recession” and observes that there continues to be “no spare capacity in the economy”. Its updated forecasts will be released at the May 24 meeting.
• If the post-cyclone rebuild creates inflationary pressures, then Conway said rates would have to rise in response to free up resources. He suggested that the government divert resources instead or increase its revenue.
• He clarified that monetary policy can’t do anything to recover lost income from pandemics, wars and natural disasters.
• See speech text here.