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Reserve Bank 'not in a good place', admits governor

The Reserve Bank has signalled it will press on with aggressive monetary policy tightening to keep inflation and inflation expectations in check.

graphic for WYTNK inflation explainer ONLY
Rising petrol and food costs are hitting household budgets hard as New Zealand emerges from its pandemic restrictions. Photo: RNZ / Vinay Ranchhod

The governor, Adrian Orr, has told an International Monetary Fund seminar that it had been caught on the backfoot, like many other central banks, by supply chain shocks and the Russian invasion of Ukraine, which had exacerbated inflation pressures.

He said the RBNZ had been "reasonably aggressive" in ending its bond buying programme last year and moving to lift the official cash rate, but was also balancing risks.

"If you go too fast or too high ... you run the risk of having a sharper than needed slow down in economic activity," Orr said in a recorded interview.

"If you go too slow, it's inflation expectations that will get away from us and at the moment the balance of risks, as far as the Monetary Policy Committee is concerned, is very much weighted toward constraining those inflation expectations in the medium term to be within the target range."

He said before the pandemic the central bank's biggest worry had been deflation not inflation, but conceded the RBNZ was now "not in a good place" and the policy direction was clear.

"We need to tighten monetary conditions and that's what we've been about."

The RBNZ raised its official cash rate (OCR) by 50 basis points to 1.50 percent last week, the fourth rise in a row, with a clear signal of more to come this year.

A growing number of analysts believe the RBNZ will follow that with a further 50 basis point rise in May, with the prospect the OCR will be touching a peak of 3.25 percent by early next year.

However, ASB economists have already started talking rate cuts.

"We do not expect the OCR to remain at 3.25 percent indefinitely, with our rates forecasts pencilling in 25bp (basis points) OCR cuts from mid-2024 as the RBNZ unwinds policy tightening and returns the OCR to more neutral levels," they said in a note.

But they noted risks to the forecast with rising interest rates hitting the housing market and household budgets and spending requiring a halt to OCR increases and then cuts.

On the other hand they said inflation could prove to be more ingrained and capacity pressures more intense forcing the RBNZ to maintain a tightening bias.

source: https://www.rnz.co.nz/news/business/465494/reserve-bank-not-in-a-good-place-admits-governor