“Watch, Worry, Wait But Willing”

RBNZ Governor Orr has clarified that the increase in the OCR profile in the Statement reflects the MPC’s upward bias given that there is a lot less room for an upside inflation surprise than a downside one, but it is not a probability. Also, the MPC discussed a rate hike at its meeting but decided that it was “confident” policy was restrictive enough to give it time to “watch, worry and wait” but it is “willing” to hike if need be.

• Reaching the inflation target by Q3 2024 is not a “deadline” but the RBNZ is nervous that inflation has been above target for some time and has not been coming down as quickly as it would like, including core and expectations. Orr observed that the increase in 10-year inflation expectations is a threat to the central bank’s credibility.
• The Governor also reiterated that policy operates with a 18-24 month lag and so not all of this cycle’s tightening has yet fed through to demand. This also means that if inflation risks result in the MPC hiking further, there is likely to be more than one move.
• The RBNZ’s message that rates will need to stay high for some time is unchanged. For it to shift to easing it will need to be “confident” that inflation will be at the mid-point of the band in 1-2 years, inflation expectations are declining sharply, demand growth is slowing including from government and there’s lower global growth.
• Orr reiterated that spending was stronger due to higher-than-expected government spending/investment but that the main driver was the increase in population growth which has boosted aggregate consumption but resulted in falling per capita spending. While immigration has increased the labour supply, it has also added to price pressures through rents and demand.