RBNZ sounds a confident note on inflation

Reserve Bank governor Adrian Orr, yesterday, expressed confidence about the future, even though he simultaneously fired a renewed barrage against price growth, continuing an approach that he called “resolute”.

The latest salvo was the fourth 50 basis point rise in the official cash rate (OCR), pushing it up to 3%.

Despite this belligerence, Orr suggested New Zealand could enjoy peace in the long run.

“We are adamant that we are on top of inflation,” Orr said.

“We have inflation down to our target range within 18 months.”

That would bring price growth down from its current rate of 7.3% to around 3% by early 2024.

Orr also had other positive news: solid household balance sheets and the probable avoidance of a recession, suggesting economic growth would decline but not go backwards.

And he argued higher retail interest rates would be affordable to borrowers, albeit with some “belt-tightening”.

Banks, he said, had stress tested their interest rates “well within the range that we are talking about at present”.

Orr went on to say the RBNZ Monetary Policy Committee came nowhere near raising the OCR by 75 points, despite speculation that it might do that.

In another comment, Orr forecast an end point for OCR rises at about 4%, though the fine print showed a slight increase from the predictions of May, from 3.95% to 4.1%.

The current 7.3% CPI growth would also start to slip back.

Initial reaction was broadly in line with the RBNZ comments. ASB economists saw “hawkish” attitudes in the RBNZ statement, but agreed that inflation expectations were appearing to peak.

They added the RBNZ “appears to be more comfortable, and so is the market.”

Westpac's acting chief economist Michael Gordon said the latest 50 point rise in the OCR was expected and two more similar rises were likely.

“However, we see more scope than the RBNZ does for interest rates to ease back in the following years,” Gordon said.

“There is growing evidence that higher interest rates are having the intended effect of slowing demand in the economy.”

Kiwibank economists had forecast a peak OCR of 3.5%, but now expected a 4% finale, in line with RBNZ predictions.

They added there was another thing that might help the RBNZ meet its goals: falling imported inflation.