In a speech today, RBNZ Chief Economist Paul Conway discussed the complexities of bringing inflation sustainably back to target, noting “remaining challenges” and various risks and uncertainties.

Conway pointed out that in the “near term”, inflation might be “more persistent” than current projections suggest. He highlighted that domestic or non-tradables inflation and services sector inflation have remained higher than expected, indicating a “sticky” inflationary environment.

Conversely, Conway also sees potential for inflation to “fall more quickly” than anticipated over the “medium term”. Factors such as increasing spare capacity in product and labor markets and shifting business and household inflation expectations could accelerate the decline in inflation.

He explained that RBNZ’s current policy strategy is “balancing these opposing factors.” The bank will closely monitor indicators of core inflation, non-tradables inflation, services inflation, and inflation expectations to assess how these risks unfold. The labor market will also be a critical signal of capacity pressure.

Full speech of RBNZ’s Conway here.

New Zealand ANZ Business Confidence improved to -37.1 in October, up from -38.3. Confidence is weakest in agriculture (-62.8) and best in construction (-14.8). Activity Outlook index dropped -0.4 to 7.4. Manufacturing (16.2) is the strongest, possibly due to lower New Zealand Dollar exchange rate. Services ranks second (12.6). Retail (-7.8) and agriculture (-2.3) are weakest.

On monetary policy, ANZ noted that “The Reserve Bank argued in the August Monetary Policy Statement that ticking along wasn’t going to do the job, in terms of getting CPI inflation sustainably back to target. We therefore continue to believe that while the impacts of higher wage growth, higher oil prices, and the weaker currency certainly mean there’s no hurry, it remains the case that an eventual OCR cut is more likely than a hike.

Full release here.

Also from New Zealand, building permits dropped -1.5% mom in September.

RBNZ Head of Financial Markets Vanessa Rayner said in speech, “unconventional” monetary policy tools will “likely remain mainstream for as long as global central bank policy rates remain at, or near record lows”. With the OCR at current low level, RBNZ has “less space” to cut interest rates further. Also, there’s a “limit to how negative rates can go before causing adverse side effects”.

“This means that other tools that utilize the balance sheet have become an important part of the ‘package’ of monetary policy instruments that global central banks have turned to,” she added. The tools can work together in different ways, to “better calibrate an ‘optimal package’ of monetary policy tools in response to future shocks”.

Full speech here.

In an interview today, RBNZ Assistant Governor Karen Silk highlighted the central bank’s readiness emphasized that there are “risks still to the upside in the near term” regarding inflation. She stated that RBNZ is “absolutely” prepared to raise interest rates if necessary, adding, “Right now we are saying that the level of restrictiveness is there, but we are awake at the wheel.”

Silk pointed out that the central bank’s primary concern is domestic inflation, particularly noting the significant miss last quarter when non-tradables inflation hit 5.8%, compared to RBNZ’s forecast of 5.3%. “Our concern is in that near term, around what are we really seeing in terms of domestic aligned inflation,” she explained.

Separately, Deputy Governor Christian Hawkesby reinforced the cautious stance, stating that “cutting interest rates is not part of near-term discussion.” He acknowledged the near-term inflation risks are to the upside but expressed confidence that medium-term inflation is returning to target.

Hawkesby emphasized that no single data point will trigger a rate hike, but the bank is closely watching domestic inflation pressures and expectations. He also noted the significant uncertainty surrounding tradable inflation moving forward.

RBNZ’s central projection is for headline inflation to fall back into its 1-3% target band by the fourth quarter of this year. However, the bank now projects that it won’t achieve its 2% goal until mid-2026.