Reserve Bank governor confident inflation will remain low

photo: Royal Bank of New Zealand

The central bank governor is confident inflation has fallen and will remain low, but he said he would not be stepping up policy just yet, despite Wednesday’s cut to the cash rate.

Central Bank Cutting the Official Cash Rate The interest rate was cut by 25 basis points to 5.25%, the first rate cut in more than four years.

Premier Adrian Orr Accused of serious backtracking But he told ABC New Zealand people should expect more cuts, with the rate falling to 3 per cent by the end of 2025.

“We are confident in the current and near-term outlook for consumer price inflation, which we estimate will be around 2.3 per cent in the quarter to September and remain around the mid-point of our 2 per cent target range over time.”

Orr said that means they can use less restraint.

“We didn’t actually step on the gas, we just took our foot off the brake.”

He said the RBNZ would monitor price-setting behaviour closely in the coming months to determine the pace of future rate cuts. But further rate cuts are on the way.

“We are forecasting a series of fairly aggressive rate cuts throughout next year. The official cash rate will be around 3 per cent by the end of 2025.”

“We could have easily relaxed but we didn’t want to have the bull back out of the paddock because it had taken so long to get here.”

Reserve Bank Governor Adrian Orr.
photo: RNZ/Dom Thomas

Mr Orr said the increase in net migration was necessary to ease labour market shortages, while per capita consumer spending had actually fallen sharply.

He also denied that the government’s spending cuts and tax cuts had any influence on the decision, saying the impact on the government budget was neutral.

There was a “very low risk” that lower interest rates would push domestic inflation higher again, but Orr said core inflation measures were all trending downward.

Orr said that cash should flow into people’s pockets quickly, given the high number of holders of short-term fixed-rate mortgages.

“There is no risk-free decision”

ANZ chief economist Sharon Zollner said Morning Report The extraordinary nature of the recession means the recovery is likely to be extraordinary too.

She said Wednesday’s rate cut proved the RBNZ was not afraid to change its mind and that any action would carry risks.

“Obviously, the economy is in a pretty bad place right now.

“Thankfully it’s not all doom and gloom, we just have to hope that inflation has enough downward momentum to give the central bank confidence that inflation will get where it should be,” she said.

“Right now we’re all watching the data closely to see what happens next.”

Change in consumer confidence needed

Retail NZ chief executive Carolyn Young said: Morning Report The move is good news for the struggling industry.

But she said it depended on how long it took for people to feel they had enough money to start spending.

“We’re already looking at a turnaround in the economy and expecting a change in consumer confidence, which will come through consumers having more money in their pockets and more confidence in where the economy is headed.

“That’s the first indicator that there’s a shift in confidence,” she said.

“We hope that things will improve by the last quarter and that growth will be achieved in the November/December period.”