Reserve Bank (RBNZ) governor Adrian Orr digesting data before softening tough talk on inflation

Reserve Bank Governor Adrian Orr is happy to weather downside surprises to inflation. Photo / Mark Mitchell

Reserve Bank (RBNZ) governor Adrian Orr continues to be nervous about high inflation.

However, he is digesting the fact aggressive interest rate hikes have weighed more heavily on the economy than expected, and will consider a string of new economic data due out before the RBNZ next reviews the official cash rate (OCR) on February 28.

Orr appeared before Parliament’s Finance and Expenditure Committee on Wednesday morning to talk about the central bank’s Monetary Policy Statement released on November 29.

While the RBNZ talked surprisingly tough on inflation in the statement, underlining its willingness to lift the OCR again if required, traders in financial markets continued to price in interest rate cuts.

Much weaker than expected gross domestic product (GDP) data released last week, and commentary by the US Federal Reserve around rate hikes being over, only saw wholesale interest rates track further south.

Indeed, ANZ has just cut its two- and three-year mortgage rates by 20 and 14 points, respectively. Meanwhile, it has lowered its two-, four- and five-year term deposit rates by up to 25 points.

ASB economists have also just revised their OCR outlook, and now see the first cut occurring in August - six months earlier than previously expected.

Orr candidly acknowledged the release of the RBNZ’s November statement already felt like a “lifetime ago”.

He repeated key messages from the hawkish statement - as expected - and acknowledged the “surprisingly subdued” GDP data.

“We are presently internalising that complex situation,” he said.

Orr added that there was a lot of data due out before the RBNZ next reviewed the OCR, including new inflation and labour market figures.

The RBNZ would also have a clearer sense of how the new Government’s policies would affect the economy, with Finance Minister Nicola Willis releasing a mini budget on Wednesday afternoon, and the Treasury publishing its half-yearly set of economic forecasts.

“We remain nervous - that’s what we’re paid to do,” Orr said.

“Inflation remains too high and the committee remains wary of ongoing inflationary surprises.

“In one sense, we are more able to enjoy and weather downside surprises to inflation at this point, rather than upside - limited to risk tolerance.”

Orr also acknowledged the fact different economies’ pathways out of the Covid period were diverging.

He highlighted the differences between New Zealand and the US, where there is the most talk of interest rate cuts.

He noted New Zealand has had stronger net inward migration, which is adding more to demand in the economy than it is to supply, putting upward pressure on inflation.

Orr said other countries with strong inward migration - Australia, Canada and the UK - were in a similar position to New Zealand.

On the contrary, there is a lot of flexibility and mobility within the US labour market.

“It really has created significant differences across economies,” Orr said.

Separately, Orr commented on the Government’s decision to remove the RBNZ’s “dual mandate”, and require it to target inflation, not inflation and employment.

“It’s a repackaging around communication,” Orr said, noting the RBNZ has, and always will, look closely at the labour market when setting monetary policy.

“I do want to repeat that we would not have made any different decisions on monetary policy in the past five years under the new remit,” he said.

“We have not come up against a trade-off between inflation and unemployment over the recent periods. Without doubt, under both remits, low and stable inflation remained our top priority.”

The RBNZ supported giving inflation priority in its remit.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.