RBNZ to tackle inflation sooner rather than later

  • By Zilla Efrat

By getting on top of inflation pressures quickly and by raising interest rates sooner, the Reserve Bank of New Zealand aimed to prevent the need for even higher rates in the future, Governor Adrian Orr said on Friday.

In a speech to the Waikato University Economics Forum, he said the RBNZ’s monetary policy committee was acting to ensure inflation headed back to within its 1-3 per cent per annum target range. And, it would do so without causing undue volatility in interest rates, the exchange rate or output.

New Zealand has raised the OCR by 25 basis points twice in 2021 and once in 2022.

Orr noted that market pricing of future central bank policy rates continued to indicate that New Zealand is expected to tighten policy sooner than many other comparable economies.

He said the recent easing in global monetary conditions had driven up asset prices. In New Zealand this had been most evident – and certainly most discussed – in residential house prices.

Like high consumer price inflation, he said the rapid rise in asset price inflation had been a global phenomenon. However, the rise in New Zealand house prices was considerable and had taken the level of house prices above its sustainable level.

Orr noted that the recent increase in New Zealand’s consumer price inflation, to a large extent, had been driven by global disruptions that had caused sharp price increases for critical commodities and a broad range of imported goods and services.

While global factors accounted for much of the recent high inflation, domestic factors also played a large role. This is an important reason why the RBNZ had responded by acting to reduce the level of monetary stimulus over recent months.

It also expected to continue to do so until it was convinced that inflation was confidently contained, and employment levels are sustainable.

“Our ‘path of least regrets’ has now become one where we must ensure that consumer price inflation and inflation expectations do not rise persistently above our target level,” said Orr.

“Anything less from the committee risks spiralling long-term economic costs and reduced wellbeing for New Zealanders.”