Yahoo Finance RBNZ’s Conway Says Inflation to Keep Easing in Weak Economy
(Bloomberg) -- New Zealand’s central bank expects inflation to continue to slow but said it needs more time to be certain.
Most Read from Bloomberg
What to Know About the Deadly Flesh-Eating Bacteria Spreading in Japan
‘I Live in Hell’: Anti-Growth Fervor Grips US South After Pandemic Boom
Nvidia’s 591,078% Rally to Most Valuable Stock Came in Waves
Nvidia Becomes World’s Most Valuable Company as AI Rally Steams Ahead
Good progress is being made in bringing inflation back to the Reserve Bank’s 1-3% target band, chief economist Paul Conway said in a speech Wednesday in Wellington. Increasing spare capacity in the economy and declining inflation expectations are likely to further reduce price pressures, while “sticky” domestic costs are also expected to eventually abate.
“These processes could occur more quickly or slowly than currently projected,” he said. “Overall, a period of restrictive policy is necessary to give us confidence that inflation will return to target over a reasonable time-frame.”
At its last policy meeting in May, the RBNZ forecast that it wouldn’t start cutting its Official Cash Rate from 5.5% until the third quarter of next year. Economists expect it to pivot much sooner than that, with most picking a move late this year and some forecasting a start to easing in early 2025.
The economy has contracted in four of the previous five quarters and may have only just managed to exit recession in the first quarter of this year, with growth of 0.1% expected when that data is published tomorrow.
Policymakers expect spare capacity to start emerging in the economy over 2024, and that will “feed through strongly into lower domestically generated inflation,” Conway said, adding this expectation is supported by recent RBNZ research.
One study found that the effect of capacity pressure on inflation, as captured by the Phillips curve, has become stronger over recent years, he said. This suggests that remaining inflation could decrease quickly as spare capacity emerges in product and labor markets.
“Second, we expect households and firms to increasingly build lower inflation expectations into their wage- and price-setting decisions,” Conway said. “Because inflation expectations can become self-fulfilling, lower inflation expectations will help reduce inflation persistence.”
‘A Touch Dovish’
The RBNZ’s hawkish bias in recent months has been driven by concerns that domestic, or non-tradable, inflation has remained more elevated than expected.
Conway said the bank anticipates that disinflation will spread across a wider set of non-tradables that typically take longer to react to monetary policy, such as restaurant meals and ready-to-eat food.
“Inflation in this category of non-tradables increased relatively slowly over the pandemic and has only recently started to decline,” he said. “This decline is likely to continue as the labor market continues to ease.”
The tone of Conway’s speech “felt a touch dovish relative to what it might have been,” said Doug Steel, senior economist at Bank of New Zealand in Wellington. “We continue to see the first rate cut in February, but the recent incoming data suggest the risk of an early move has increased.”
Conway wouldn’t be drawn on whether the RBNZ has re-evaluated its assessment of risks or when interest rates could be expected to fall.
“I can’t give you the magic formula of when interest rates are going to decline,” he said. “We look at everything to give us the confidence that inflation will be sustainably back in the band, and we are just not there yet.”
(Updates with economist’s comment in 12th paragraph)
Most Read from Bloomberg Businessweek
Coke—and Dozens of Others—Pledged to Quit Russia. They’re Still There
Google DeepMind Shifts From Research Lab to AI Product Factory
©2024 Bloomberg L.P.
