Orr Says RBNZ Still Needs to Truly Anchor Inflation Expectations

Matthew Brockett, Bloomberg News

Adrian Orr, governor of the Reserve Bank of New Zealand (RBNZ), speaks during a news conference in Wellington, New Zealand, on Wednesday, Aug. 16, 2023. New Zealand’s central bank kept interest rates unchanged for a second straight meeting, while signaling a risk that it may need to tighten further to tame inflation. , Bloomberg

(Bloomberg) -- New Zealand central bank governor Adrian Orr said policymakers still need to ensure that inflation expectations are contained, suggesting they won’t be signaling a pivot to interest-rate cuts anytime soon.

While all measures of price pressures have declined, headline inflation at 4.7% remains more than twice the 2% midpoint of the Reserve Bank’s 1-3% target band, Orr told the New Zealand Economics Forum at Waikato University on Friday. Two-year ahead inflation expectations declined to a two-and-a-half-year low of 2.5% in the first quarter, the RBNZ said earlier this week.

“We’re moving in the right direction but it’s this tail end,” Orr said. “We’ve got more work to do to have inflation expectations truly anchored at that 2% level. This is the part where capacity pressures and inflation expectations are the monetary committee’s real focus.”

Central bankers around the world have recently been pushing back against investor bets that rate reductions are imminent, saying they need to be sure that inflation is tamed. The RBNZ has taken an even more hawkish stance, warning late last year that further rate increases can’t be ruled out and saying it won’t entertain cuts until 2025.

The RBNZ’s Monetary Policy Committee will deliver its first rate decision of the year on Feb. 28 with most economists expecting it to maintain the Official Cash Rate at 5.5%.

“The strong emphasis of the speech on addressing persistent underlying inflation, which remains high, suggests that OCR cuts are not on the immediate horizon,” said Mark Smith, senior economist at ASB Bank in Auckland. “The RBNZ will need to see concerted progress is being made in lowering core inflation before cutting the OCR.”

Orr spoke at length about core inflation, saying the RBNZ wants to see it return to the 1-3% target. The bank’s preferred measure of core inflation eased to 4.5% in the fourth quarter.

“We observe headline but we are targeting in a large sense core inflation,” Orr said.

(Updates with economist’s comment in sixth paragraph)