Reserve Bank Governor Adrian Orr says there are early signs inflation is slowing and should be back down to three per cent by the middle of next year.
He told TVNZ’s Breakfast that the inflation rate should be down to five per cent by the end of this year and down to three per cent by mid-2024.
Orr said yesterday’s call to lift the official cash rate (OCR) by 50 basis points was fully anticipated by financial markets.
LISTEN: Mike Hosking talks to Reserve Bank Governor Adrian Orr
He said they raised it because demand needs to slow.
At this point, demand was still out-pacing supply which meant ongoing interest rates were necessary.
”It’s not about how many moves you’ve had, it’s about where you started from and where you’ve got to,” said Orr.
He said we keep getting hit by economic shocks, most recently the Hawkes Bay and Gisborne floods, which would create upward pressure on near-term prices and medium-term inflationary pressure.
”There are harder things going on in the economy at the moment, so we’re really feeling for all of New Zealanders impacted severely by the floods,” he said.”Inflation is not going to help people dig their way out of these challenges.”
Orr told Newstalk ZB’s Mike Hosking Breakfast show they were “well past halfway” on understanding exactly how much the recent cyclone damage would cost the economy.
“We’ve got a very good fix on the regions - what they generally produce, export, so the economic activity is well measured.
“Our challenge...is just what devastation has happened to the capital stock, the productive capacity, of the area.”
He said they did not know the scale, the timing or the means of funding of what the Government’s investment was going to be.
On those areas, they would make assumptions, he said.
Around one per cent had been added to their outlook for GDP over the next couple of years that would be related to the rebuild activity.
Orr said the one per cent of GDP was, in terms of thinking about the scale of the latest natural disaster, significantly less than the Christchurch earthquakes.
”But it is very material for the insurance companies,” he said.
”And then in the near term - without doubt - exports down, economic activity down and some upward price pressures.
”That is in the very near term.
”We look through that with our monetary policy.
“We’re more interested in the 18 months- two years ahead and that’s that 1 per cent GDP lift activity.”
Orr said people would see some prices rise in the cyclone aftermath.
”As long as they don’t feed into aggregate expectations that everyone thinks: ‘Oh, this is inflation continuing and I better raise ice cream prices in Invercargill because Hawke’s Bay’s rebuilding’.
”That’s the concern we have. This is why we have restrictive monetary policy at the moment.”
Reserve Bank Governor Adrian Orr yesterday lifted the official cash rate (OCR) by 50 basis points, to 4.75 per cent, despite billions of dollars in damage the economy faces after Cyclone Gabrielle.
The Reserve Bank still expects the official cash rate to peak at 5.5 per cent despite the devastation from Cyclone Gabrielle.
The Monetary Policy Committee yesterday agreed the OCR should increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term.
It was too soon to accurately assess the monetary policy implications of Cyclone Gabrielle, the committee said.
“All else being equal, these severe storms will keep CPI inflation high for longer and may lead to a longer period with inflation above 7 per cent,” the committee said.
Over coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected.
The Committee assessed that, while the balance of risks around inflation remained skewed to the upside, the extent of this risk had moderated somewhat since November.
As a result, a 50 basis point move balanced the need to ensure core inflation and inflation expectations fall, against the early signs that demand was beginning to moderate towards the economy’s productive capacity.
With the economy facing a major new challenge, Orr faces a tough task communicating the Reserve Bank’s monetary policy strategy.
Early estimates have the total cyclone damage bill running to around $13 billion but that includes costs covered by insurance.
Currently, at 7.2 per cent, inflation was below the RBNZ forecast of 7.5 per cent and the balance of risks was tilted to the downside.
Gisborne and Hawke’s Bay, both badly affected in the cyclone, account for about 3.5 per cent of GDP between them, ASB chief economist Nick Tuffley said.
Nearly 90% of new mortgage lending in October was floating or fixed for a year or less.