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New Zealand central bank says economy slowing, still not sure if rates high enough

Tan KW
Publish date: Thu, 23 Mar 2023, 02:49 PM
Tan KW
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WELLINGTON A top New Zealand central banker on Thursday (March 23) said interest rates are clearly in contractionary territory, and causing a welcome slowdown in demand in the economy, though it is not yet clear that inflation expectations are under control.

Reserve Bank of New Zealand (RBNZ) chief economist Paul Conway said the 450-basis-point rise in the official cash rate (OCR) over the past 18 months is still "percolating" through the economy, and would likely further weigh on consumer spending.

At 7.2%, inflation in New Zealand is near a three-decade high, and well above the central bank's target bank of 1% to 3%. Also, short-term inflation expectations in the first quarter remained just above 5.5%, according to RBNZ data.

"On balance, our measures of neutral interest rates - the interest rate that is neither stimulatory nor contractionary - indicate that the OCR is now comfortably above neutral, and having the desired contractionary effect," Conway said.

But he added that if inflation expectations do not fall, the central bank would need to do more work through interest rates to bring those expectations down. It would also need to do more work through "the real side of the economy", he said, without elaborating on that point.

Conway spoke at the KangaNews-ANZ New Zealand Capital Markets Forum in Wellington.

The central bank has lifted the OCR from 0.25% in October 2021 to 4.75%, and signalled that it plans further increases. It has said it is trying to engineer a shallow recession to slow demand. Fourth-quarter gross domestic product fell 0.6%.

Conway said there are welcome signs that demand is slowing but, given recent weather events and the ongoing impact of the pandemic, forecasting the economy is very challenging right now.

"We're starting to see signs of people cooling their jets," he said. "It's pretty lumpy; it's bouncing around."


  - Reuters


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