RBNZ Chief Economist Paul Conway, speaking at a webinar today, noted that emphasizing the contractionary nature of current interest rates is effectively “tapping the brakes” on the economy to moderate its pace of growth and address inflationary pressures.
Conway expressed optimism about the recent declines in core inflation and business inflation expectations. However, he also highlighted ongoing concerns regarding elevated household inflation expectations, which pose a potential risk to the inflation outlook.
Looking forward, Conway underscored the necessity for OCR to maintain a restrictive level “for some time into the future” to get headline inflation, currently at 4.7%, back into the 1-3% target band.
An interesting consideration Conway raised was the impact of Fed’s policy moves on New Zealand’s monetary policy trajectory. He suggested that if Fed were to initiate rate cuts towards the end of the year, and RBNZ did not follow suit, the resulting appreciation in NZD could alleviate inflationary pressures in New Zealand. This scenario might prompt RBNZ to reassess its rate cut timeline, leading to earlier-than-anticipated adjustments depending on the broader economic implications.
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