NEW Zealand’s central bank intends to reduce interest rates towards a more neutral setting at a measured pace, now that it has begun its easing cycle, Reserve Bank of New Zealand (RBNZ) governor Adrian Orr said.
The RBNZ cut the Official Cash Rate by a quarter-percentage point to 5.25 per cent yesterday and forecast it would decline to 3 per cent by mid-2027. Orr said policymakers estimate that’s around the level of the neutral rate.
“We want to get there at a careful and measured pace to ensure that inflation expectations remain anchored at the 2 per cent target rate,” the governor said on Thursday (Aug 15). “That is our single focus.”
The RBNZ began its easing cycle much earlier than previously signalled as the economy slumps and inflation slows. The central bank reckons the economy is now in its third recession in less than two years while inflation will return to its 1 to 3 per cent target range in the current quarter.
Indicators of inflation pressures are giving the central bank confidence it is on the right course, Orr said.
“The important things that we have been watching for have actually been around price setting behaviour, inflation expectations and the path of the domestic homegrown inflation components,” he said.
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“All are now aligned with low and stable inflation being restored to New Zealand and that’s the outlook for the next couple of years.”
Orr said while the economy is currently weak, the outlook is for gross domestic product to begin expanding in late 2024 and to 2025 so there is no need for more stimulus.
“There are many things that are pointing in the right positive direction for economic growth,” he said. “We see positive economic growth coming and we can be easing interest rates. So we have growth without the inflation.”
Orr said one reason for the economic contraction is that New Zealand has poor productivity and a low potential growth rate, so when the brakes are applied through high interest rates GDP stalls.
“We have pulled back on the spending around a low potential economy and hence we are printing negative GDP,” he said. “The answer? Improve the average speed capability of the vehicle we are driving, and that is productivity.” BLOOMBERG
