Reserve Bank of New Zealand Assistant Governor Karen Silk said there are still upside risks to the inflation outlook and the forecast peak in the bank’s cash rate is “not set in stone.”
(Bloomberg) — Reserve Bank of New Zealand Assistant Governor Karen Silk said there are still upside risks to the inflation outlook and the forecast peak in the bank’s cash rate is “not set in stone.”
“This is still an economy that has excess demand, a tight labor market, and as a consequence both headline inflation and core inflation at levels that are well outside the (target) band,” Silk said in an interview with Bloomberg News Friday in Wellington, adding that short-term inflation expectations are also too high. “So there’s still more work to do here.”
The RBNZ this week increased the Official Cash Rate by 50 basis points to 4.75% and projected it will need to rise to a peak of 5.5% later this year to bring inflation back within its 1-3% target band over the medium term.
The hike was a step down in the pace of tightening after a 75-point move in November, but Silk wouldn’t be drawn on whether a further slowing could come at the next policy meeting in April.
“All levels are on the table for discussion at every meeting,” she said. “I’m not going to turn round and comment on whether we would be looking at 25, 50 or 75, they will all be on the table for discussion and they will depend on the information at hand.”
A pause in tightening is “certainty not something that we’re contemplating at this point in time,” she said.
Silk said the RBNZ is “taking a little bit of comfort” from the fact that indicators had evolved largely as it expected since November.
But the outlook is still subject to uncertainty and shocks — a good example being the recent cyclone that devastated large areas of the North Island.
Asked about the balance of risks to the inflation outlook, she said the bank’s forecast OCR peak has some upside risk built into it.
However, “without building that in, any variation to that peak would have been still at the margin,” she said. “There’s potentially still some upside risk on the fiscal side of it. Let’s just see how it plays out over the next six weeks.”
Silk said the RBNZ’s central projection is based on the information at hand today.
“We will do what we need to do to get inflation back under control,” she said. “As more information comes to light, we will continue to review our position.”
Silk said the RBNZ feels more comfortable now that the cash rate is in “contractionary” territory. The bank has been revising up its estimate of a short-term neutral rate — currently 3.8% — which the OCR finally overtook with the November hike.
“We do feel comfortable that we’re in a contractionary position both with the OCR and where wholesale rates and retail rates are today,” Silk said. “You’re working with the data you have at that point in time, and that data is always subject to revision,” she added, citing upward revisions to the strength of the economy.
The RBNZ forecasts a recession starting in the second quarter of this year as the full impact of soaring mortgage rates is felt by households rolling over fixed-term loans.
Highest Peak
A cash rate peak of 5.5% currently puts the RBNZ higher than the expected tightening summits of the US Federal Reserve, Bank of England, European Central Bank and Reserve Bank of Australia.
Silk rejected the notion that the RBNZ’s dual mandate — inflation and employment — was forcing it to tighten policy more than some of its peers given the strength of New Zealand’s labor market.
“There’s no conflict in relation to those mandates at this point in time,” she said.
Silk didn’t think policy would be any different under a sole inflation mandate — something the main opposition National Party has pledged to restore if it wins the October election.
“All I would say is employment conditions, labor conditions are one of the things that feed into inflation, so we are always giving consideration to the position of the labor market and where employment sits,” she said. “It’s not something that you only consider because it’s sitting in your mandate today.”
(Updates with comments on neutral rate, dual mandate)
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