(Bloomberg) — New Zealand central bank Governor Adrian Orr downplayed the chances of another interest rate hike, saying the bank would only tighten policy further if it felt it needed to contain inflation expectations.
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“Another rate hike would only be meaningful if we thought inflation expectations were getting away on us again, starting to rise because of the persistence of actual inflation,” Orr said in an interview on Bloomberg Television Thursday in Wellington. “We are confident that we will get inflation down to the 1-3% band, we’d just like to make sure we get there soon without risking another blowout in expectations.”
The Reserve Bank held its benchmark rate at 5.5% yesterday but surprised markets by saying it considered a hike. The RBNZ also raised the forward track for the cash rate, signaling increased risk of further tightening.
Orr was asked whether another rate hike would be effective given inflation is elevated in areas of the economy that are less sensitive to monetary policy, such as insurance costs and local government taxes.
“We know that forward-looking inflation is heavily influenced by the current level of inflation, so that’s our main concern,” he said.
Two-year ahead inflation expectations declined to 2.33% in the second quarter from 2.5% in the first, according to a survey of businesses published by the RBNZ this month. That was the lowest reading in almost three years. A measure of household expectations was more elevated at 3%.
The central bank aims to keep inflation around the 2% midpoint of its 1-3% target band. Inflation eased to 4% in the first quarter, but a measure of domestic price pressures barely slowed to 5.8%.
The RBNZ has said it has limited tolerance for further upside inflation surprises. But Orr said its patience has not yet run out and policy would not hinge on a single data point, such as the second-quarter inflation print due in July.
“What we are showing is that we’ve got a lot of patience,” he said, adding the RBNZ’s central projection is to keep the Official Cash Rate at 5.5% into next year.
“We believe that will have inflation back down within the band, and at that point we can start thinking about normalizing interest rates,” he said.
Orr said the sticky prices the bank has talked about “have been well signaled and they are in our inflation projections.”
“So it’d have to be something over and above that again to really surprise us,” he said. “We think the risks are balanced.”
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