RBNZ Decided It Needed To Be Patient Rather Than Hike Again

RBNZ Governor Orr said that raising rates was a “real consideration” at the May meeting because of the higher starting point for domestic inflation and lower potential growth but decided that patience was needed as policy is restrictive and the output gap growing. The RBNZ will keep policy restrictive until it is confident that it has returned inflation to target.

• The first rate cut was delayed in the forecast due to the higher inflation starting point, lower potential output and sticky domestic price components.
• Governor Orr dismissed that there is an 80% chance of a rate hike by year end and Conway added that it is a “spurious” interpretation. Orr said the 2024 path reflects the RBNZ’s asymmetric reaction function to upside inflation surprises. The RBNZ focuses on 18 months or more ahead and knows the near term is volatile.
• Orr said that NZ is at the slow moving, less rate sensitive moment for inflation. The domestic components currently slowing the disinflation process, such as rents, rates and insurance, have low rate sensitivity and so will be slow to fall. It is these factors that need to see disinflation to bring overall inflation from 4% to 2% and that is going to be slower than the disinflation that has already taken place, but that is usual and is occurring globally.
• A further rate hike would have affected the rate sensitive components the most and these are not the ones that need to slow, whereas there would have been limited impact on the areas that need to see material disinflation.
• A new development was the downward revision of the potential growth rate due to low productivity growth, which is creating more domestic inflationary pressures. The best thing the RBNZ can do to boost productivity is to have low and stable inflation.