WELLINGTON: New Zealand central bank governor Adrian Orr said monetary policy is now contractionary after Wednesday’s record interest-rate hike.
“We can all put our hands on our hearts across the committee and say we are officially contractionary with our monetary policy at this point,” Orr told a parliamentary committee yesterday. “It’s been a long haul from extremely low interest rates through the shock period to something that we would consider now contractionary on spending behaviour.”
The Reserve Bank of New Zealand (RBNZ) has raised the Official Cash Rate (OCR) by 75 basis points to 4.25% – the biggest increase since the OCR was introduced in 1999 – and projected the benchmark will need to reach 5.5% next year to return inflation to its 1% to 3% target.
The central bank projects a more prolonged period of restrictive policy that will push the economy into a 12-month recession starting in the second quarter of 2023. The RBNZ has raised the OCR by 400 basis points since it began tightening in October 2021 and has had to raise its estimate of the so-called neutral cash rate – the level at which it no longer stimulates the economy.
The Monetary Policy Statement showed the rate could be as high as 3.6% based on a model using short-term inflation expectations. “We need to get actual and expected inflation down,” Orr said. “The committee agreed that we need to reach a higher level Official Cash Rate sooner than previously anticipated.”
The RBNZ’s forecasts show inflation accelerating to 7.5% in the current quarter from 7.2% in the three months through September. The central bank expects inflation to remain at 7.5% in the first three months of 2023. “That starts to become a long period of heightened inflation that seeps into inflation expectations,” Orr said. — Bloomberg