(Bloomberg) — The Reserve Bank of New Zealand’s Monetary Policy Committee is still thinking about lingering price pressures, even as it cuts interest rates to reflect a lower inflation outlook, Governor Adrian Orr said.
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“In New Zealand, uncertainties about firms’ price-setting behavior and the persistence of inflation continue to influence the MPC’s thinking,” Orr said in a speech to the Peterson Institute in Washington DC on Wednesday. “However, these uncertainties are now set against a lower central outlook for inflation.”
The RBNZ began lowering its Official Cash Rate in August and stepped up its easing with a 50 basis-point reduction this month, taking the OCR to 4.75%. The bank is expected to deliver another 50-point cut at its final policy decision of the year on Nov. 27, with markets pricing some risk of a 75-point move.
Orr remarked in his speech that central banks must “at times act swiftly to avoid perils,” something they have had to do in recent years.
But he said during a question and answer session that after hiking rates aggressively to tame inflation, the RBNZ can take a more measured and “circumspect” approach to easing.
“On the way down we can be more incremental, and we have been,” he said. “We’re being more incremental because we’re in calmer waters but also because of that lingering inflation persistence on the domestic side.”
Even as policy is eased, it is still on the restrictive side “and it will remain there over the coming quarters as we get more and more confident that pricing behavior has renormalized,” Orr said.
The governor was flagging a “steady pace” of rate cuts, Goldman Sachs economists said in a research note after his speech.
“On balance, we interpret the governor’s comments as reducing the probability the RBNZ steps up to a 75 basis-point rate reduction at its November meeting,” they said, restating their forecast for another 50-point cut.
Investors trimmed bets on a 75-point move in November, pricing a 24% probability today down from 38% yesterday, swaps data show.
Inside The Band
New Zealand inflation, which peaked at 7.3% in 2022, has slowed to 2.2%, putting it back inside the RBNZ’s 1-3% target band. But that’s largely been driven by a decline in imported or “tradables” prices. A gauge of domestic inflation remains elevated at 4.9%.
On the other hand, the economy is likely in its second recession in less than two years and unemployment is rising, fueling calls for a swift reduction in interest rates.
Orr didn’t focus on the current weak state of the economy, saying only that economic activity will be “revitalized” as inflation stabilizes and rates fall.
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(Updates with economists’ comment)
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