RBNZ’s Breman says will see higher inflation over the near term, some growth impact
Reserve Bank of New Zealand (RBNZ) Governor Anna Breman said on Tuesday that she sees near-term inflation lift, driven by energy shocks. Breman signaled readiness to act if medium-term inflation risks build.
Key quotes
Will see higher inflation over the near term, some growth impact.
Will be looking if firms passing on costs or absorbing them.
Looking for second-round effects, if inflation expectations shift will act.
Want to make sure we do not see higher inflation over longer term.
Do not want to react too soon to inflationary pressures.
It will be difficult for businesses to pass on costs to consumers.
Banks are well capitalised, confident they can deal with any financial instability.
Cash rate at a good point where we could both increase or decrease the rate if needed.
Will not rule out either rate hikes or rate cuts.
Targeted and temporary government measures unlikely to add to inflation.
Financial conditions are tightening and could dampen growth near term and we are watching.
Even if war stops now, price and supply effects will linger.
Market reaction
At the press time, the NZD/USD pair is up 0.36% on the day to trade at 0.5857.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.
Recommended Articles
