New Zealand’s central bank Governor Adrian Orr said the nation’s economy needs a mild recession at the very least to slow activity before policymakers could consider reducing interest rates.
(Bloomberg) — New Zealand’s central bank Governor Adrian Orr said the nation’s economy needs a mild recession at the very least to slow activity before policymakers could consider reducing interest rates.
“It’s the bare minimum we need to see because without doubt demand has been well outstripping the pace of the supply capacity” of the economy, Orr said in an interview with Bloomberg Television on Thursday in Wellington. “We need to see subdued consumer spending, business investment and government constraints on spending, these are a critical part of the inflation process.”
The Reserve Bank on Wednesday held its Official Cash Rate at 5.5% for a second straight meeting, while raising its forward track slightly, indicating the risk of another hike. It forecasts the economy will contract 0.3% in the third quarter and 0.1% in the fourth, which would be the second recession in bit over a year.
Orr said he’s confident inflation will return to the RBNZ’s 1-3% target band over the medium term if rates are kept at their current level for long enough.
“We don’t feel a rush to be changing rates anytime soon,” he said. “We believe if we stay where we are for long enough, inflation will be back inside the target band mid-next year and, and stay there.”
The central bank expects inflation will slow to 2.7% in the third quarter of 2024.
See: New Zealand Signals Risk of Another Rate Hike to Tame Inflation
The RBNZ’s new forecasts see the OCR edging up to a peak of 5.59% in mid-2024 and falling to 5.36% in the first quarter of 2025, implying a rate cut isn’t anticipated for about 18 months.
The OCR track is a projection and “not us trying to provide a signal or constraint,” Orr said, adding that over two years it deviates very little from 5.5%. The RBNZ can’t provide exact forward guidance at the moment because there are too many uncertainties that need to be managed, he said.
“We think that it nicely balances the near-term risks to the upside on inflation and growth versus the more medium term downside risks to inflation,” Orr said. “We’re very confident over the horizon that matters for us — one to two years ahead — that we’re being restrictive with monetary policy and in a position where we could tighten or loosen as needed.”
(Updates with governor’s comments from fifth paragraph.)
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