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.
BoJ Minutes highlight concerns over weak Yen’s impact on inflation
Minutes from BoJ’s April 25-26 meeting revealed that board members are closely monitoring the ongoing risks posed by the weak Yen and its effect on inflation, which could force a monetary policy response.
“Some members” emphasized that exchange rates are crucial factors influencing economic activity and prices, suggesting that “monetary policy responses would be necessary” if there were significant changes in the economic outlook or associated risks.
One of these board members noted the “trilemma of international finance,” arguing that monetary policy should not be used solely to stabilize foreign exchange rates. However, they acknowledged that if exchange rate movements impacted firms’ medium- to long-term inflation expectations and corporate behavior, this could “raise the risk of prices being affected,” making monetary policy adjustments “necessary.”
The minutes also reflected a shared understanding among members that if underlying inflation increases in line with forecasts, BoJ would adjust its degree of monetary accommodation. Additionally, any changes in the outlook for economic activity and prices, or shifts in related risks, would warrant adjustments to the policy interest rate.
Full BoJ minutes here.