New Zealand has way to go to get inflation to 2%, says economist

WELLINGTON: New Zealand needs more time to get inflation back into the central bank’s 1% to 3% target band even though the economy is weaker than expected, Reserve Bank chief economist Paul Conway says.

“Monetary policy is working, with the economy slowing and inflation falling,” Conway said in a speech on Tuesday.

“But we still have a way to go to get inflation back to the target midpoint.”

His comments doused speculation that the Reserve Bank of New Zealand (RBNZ) is preparing to pivot toward interest rate cuts and the currency gained..

“The tone of the comments on recent data were hawkish and seemed to push back on market expectations for any policy easing in the near term,” said Satish Ranchhod, senior economist at Westpac Banking Corp.

The comments are “consistent with our forecast that any easing in policy is still some way off. Market pricing for easing in the first half of this year seems premature”.

In November, the RBNZ said the official cash rate (OCR) needed to remain at 5.5% through 2024 to get inflation back into the 1% to 3% band.

But a December report showing the economy unexpectedly contracted and a weaker-than-expected consumer price index (CPI) reading fanned expectations of rate cuts beginning as soon as May.

Conway, who is a member of the Monetary Policy Committee, declined to comment on the path of interest rates ahead of the Feb 28 decision.

Economists expect the RBNZ will leave the OCR unchanged at that meeting.

He said the third-quarter contraction in gross domestic product (GDP), and revisions that meant growth was much slower through 2023, showed weaker demand but also a lower level of productive capacity in the economy.

“The recent GDP revisions do not necessarily mean that capacity pressures in the economy are much lower than previously assumed,” he said.

Conway said the revisions reflected weaker government spending while private demand had mostly been revised up.

Policymakers are also watching immigration growth that drove higher housing rents and construction costs in the latest CPI, Conway said.

While headline inflation was 4.7% in the fourth quarter, less than the RBNZ’s 5% projection, non-tradables inflation didn’t slow as much as the bank expected.

Non-tradables, which is an estimate of domestic price pressures, remains “stickier” and “a long way from 2%”, he said.

“It is reassuring that inflation is falling,” he said.

“But the point that we made in the November statement and that I’m making in this speech is that we still have a ways to go, especially with non-tradables inflation where it is.

“So we’re heading in the right direction, but we are not there yet.” — Bloomberg