Firms, workers need to lower inflation expectations - RBNZ

Thu, Mar 23
New Zealand bank notes (file picture).

The Reserve Bank is renewing its warning that inflation is too high and businesses and workers need to lower expectations to avoid a deeper than expected recession and higher interest rates.

Central bank chief economist Paul Conway has told a finance conference that raising the official cash rate to a 14 year high of 4.75 percent is starting to slow demand, although the rises are still "percolating" through the economy.

RBNZ was "incredibly determined" to bring inflation back within the 1-3 percent target band, but rate rises could not mend the supply disruptions and storm damage to the economy, nor could it compensate people for lost income, he said.

"This means firms and workers and taxpayers accepting the distributional consequences of recent global and domestic shocks and lowering their inflation expectations accordingly."

Conway said if that did not happen then "monetary policy would need to be more contractionary for longer, resulting in a deeper recession".

Inflation was close to a 32 year high at 7.2 percent annual rate, which has seen the RBNZ raise the cash rate at 11 consecutive reviews since October 2021, and caused it to talk in increasingly severe terms about the need to slow consumer and business demand in the economy, even to the extent of engineering a recession.

Speaking to reporters after the presentation, Conway batted away questions on the economic data since its February statement, which has included inflation and economic growth coming in below the RBNZ's forecasts.

He said work was underway on the RBNZ's next rate review on 6 April.

Financial market expectations were currently leaning to a rise of 25 basis points at that meeting followed by a similar sized rise in May, taking the cash rate to a peak of 5.25 percent.

"We're starting to see signs of people cooling their jets ... it's pretty lumpy, it's bouncing around, it can be challenging to extract signal from the noise and the economy at the moment. But yeah, as we said in February, there are encouraging signs."

Conway also repeated RBNZ confidence in the financial strength of New Zealand banks amid the recent international turmoil involving several second level US banks and the global giant Credit Suisse.