New Zealand’s central bank would need to see a significant upside inflation surprise to return to more aggressive interest-rate hikes, Governor Adrian Orr said.
(Bloomberg) — New Zealand’s central bank would need to see a significant upside inflation surprise to return to more aggressive interest-rate hikes, Governor Adrian Orr said.
“It would take a significant upside inflation shock from where we are” to put 75 basis-point moves back on the table, Orr told Bloomberg Television Thursday in Wellington. “The economy has been unfolding fully as expected since our November statement, so we would need a significant surprise.”
The Reserve Bank yesterday increased the Official Cash Rate by 50 basis points to 4.75% after a 75-point increase in November. Orr has said all options will be on the table when policy makers meet again in April, although some economists expect the bank may slow the pace of tightening further.
The RBNZ made its decision based on a preliminary assessment of the growth and inflation impacts from recent storms that destroyed homes, roads and bridges across New Zealand’s North Island. The rebuild is expected to boost activity and fan price pressures by increasing demand in capacity constrained industries like construction.
Orr said there is a risk those pressures will require the OCR to stay higher for longer.
“We’re looking at about a 1% addition to GDP over coming years,” he said. “That is well manageable within the current monetary settings. But if inflation expectations continue, if core inflation is more persistent, then tighter for longer is certainly an outcome.”
Orr said globally the pressure on prices may be easing as economic growth slows, which underpins the RBNZ’s projection that inflation will return to its 1-3% target by the second half of 2024.
“Some of the downside risks are actually assisting on the inflation battle,” he said. “Economies are evolving broadly as anticipated, excluding these ongoing shocks. So I’m very confident that low and stable inflation will return.”
–With assistance from Shery Ahn and Haidi Lun.
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