Reserve Bank Governor Adrian Orr is set to give a speech ahead of the RBNZ's first Official Cash Rate decision of the year in which he will discuss why the RBNZ "continues to believe that a flexible inflation target centred on 2% still makes sense".
Orr is set to speak at the high powered 2024 New Zealand Economics Forum at the University of Waikato on Friday, February 16.
He has previously appeared at these events, so, there's nothing surprising, as such, in his appearance this year.
However, last year the subject matter of his speech was on the rather more generic 'promoting economic wellbeing' topic, while this year's topic appears far more specific - and also potentially market moving.
Orr's decision to, it appears, defend the RBNZ's specific targeting of 2% inflation comes at a time when there's widespread expectation of interest rate cuts soon. And it also comes at a time of discussion around the RBNZ's inflation targets and whether they should be reviewed.
The RBNZ has a target of maintaining inflation within a 1% to 3% band, but with a focus on keeping future inflation "near the 2% midpoint".
Inflation has now been outside of the RBNZ's 1% to 3% range for over two and a half years and the RBNZ's not forecasting inflation to return within that band till the September quarter of this year. However, it doesn't forecast that inflation will actually hit the 2% midpoint of the inflation target till September 2025 - in more than a year-and-a-half's time.
Annual inflation, as measured by the Consumers Price Index (CPI) was 4.7% at the December quarter, down from 5.6% in the September 2023 quarter.
The RBNZ has strongly driven up interest rates in the fight against inflation, pushing the Official Cash Rate up all the way from just 0.25% as of the start of October 2021 to the current 5.5%.
With inflation now coming down quickly, financial markets are anticipating falls in the OCR sooner rather than later, with three cuts to the OCR currently being priced in by the markets this year.
However, in a speech given online this week RBNZ chief economist Paul Conway - breaking the RBNZ's three month summer 'silence' between the last OCR announcement of 2023 and the first of 2024 on February 28 - pushed back against such expectations.
After Conway's speech, BNZ head of research Stephen Toplis questioned the RBNZ's desire to get inflation to the 2% midpoint of the target.
"...We would like to think that a better approach would be to simply be less dogmatic about getting inflation to the midpoint of the target band. Alan Bollard, when he was central bank governor was much more relaxed about using the full width of the band. This didn’t seem to cause too much problem," he said.
"And, anyway, even were we to be dogmatic about targeting a mid-point, we have yet to hear a good argument as to why we should be confident that 2.0% is the optimal number. As a point of contrast, if inflation was forecast to be 2.25% in both New Zealand and Australia the Reserve Bank of New Zealand would be running tight monetary policy and the Reserve Bank of Australia loose. Which [central] bank would be right?"
In a note advising of Orr's February 16 speech, the RBNZ said that in his address, Orr "will speak about the changing drivers of inflation over the past couple of years and the shift from transitory to more stubborn underlying inflation. He will also discuss why – despite these challenging years – the Reserve Bank continues to believe that a flexible inflation target centred on 2% still makes sense".
"Orr will also talk about the year ahead for the Reserve Bank. As a full-service central bank, the RBNZ has a wide mandate that spans monetary policy, financial stability, cash operations, and financial markets infrastructure. Ensuring we achieve our mandate is important for New Zealand’s long-term prosperity and economic wellbeing, and we have a full agenda ahead of us to ensure we do so."
33 Comments
There is a reason they are independent and have a target to meet - this exact scenario where people want to avoid the short term pain (recession) at the risk of very long term pain (hyperinflation).
Making the target optional when it doesn't suit is a really bad idea. Changing the target when it doesn't suit is also a really bad idea. If we wanted to change the target we should have done so while we were on target, not now.
"Hold stubbornly out for 2% at the prospect of losing your job and destroying the lives of millions of NZers" - that is their job.
Australian inflation down to 4.1%. Raised rates slower and a lot less.
Economist buddy backs into Aussie inflation data.
Top 3 contributors to quarterly CPI (ex-tobacco)
- New dwelling purchases by owner occupiers
- Domestic holiday travel and accom
- Medical services
Top 3 subtractors
- H'hold furniture
- International holiday travel and accom
- Lamb and goat
In Aussie and NZ, the property ponzi is everything. If you want lower inflation, fair to assume the ponzi will be constrained. You can't have your cake and eat it too.
Thats because the RBA shut down their equivalent Funding For Lending programme in June 2021 when it was clear there was no "emergency", unlike the RBNZ who decided to keep juicing the property bubble until December 2022.
Understand what you're saying but that's beside my point. 'Can't have your cake and eat it too' is the main takeaway. Show me any country in the world that has been able to maintain a property ponzi with a low-inflation / low-cost environment. It's absurd and the stuff of fantasy.
When you discover you're riding dead horse, the best strategy is to get off and quickly find new mount. In business, it's often difficult to get out of our investments in dead horses, which leads us to try other strategies to breathe life into hopeless investments, including the following:
1) Change riders (blame the ukraine war and external inputs)
2) Buy stronger whip (crank the OCR after waiting too long)
3) Harness several dead horses together for increased speed ("inflation is a multifaceted problem" Transitory? LOL)
4) Emulate the best practices of companies riding dead horses (let's copy other countries like the USA and she'll be right)
5) Outsource the ridership of the horse (Stats NZ with incorrect stats that get revised later and swept under the rug)
6) Affirm that "this is the way we have always ridden this horse" ("we need to engineer a recession")
7) Change the requirements, declaring that "This horse is not dead" (The NZ property market is on the way up! LOL)
8) Perform cost analysis to see if contractors can ride it cheaper (Blowout in Govt Costs form Labour Govt)
9) Promote the dead horse to management position (Promotion of incompetence in RBNZ and Govt who acto n image as opposed to accountability and/or integrity)
10) Have the lawyers bring suit against the horse manufacturer (Blame domestic inflation being too high)
11) Put out news release that, in the unlikely event the horse is dead, it was dead before it ever came to the company. (Everywhere else has high inflation, it is a global problem not a n NZ problem)
Nothing inherently wrong with a 2% target. Or 3%. Or 5%. Or even 10%.
Just so long as they use justifiably sensible, timely, real-world data and look forward to what is most likely happen without bias and prejudice. Not sure that is happening though.
Hope Orr takes the opportunity to let these 'business leaders' know that their actions in price setting are a major reason why the rest of NZ Inc. is going backwards.
Nothing inherently wrong with a 2% target. Or 3%. Or 5%. Or even 10%.
It appears we are 100% reliant on unelected bureaucrats to determine the price of money and managing expansion of the money supply.
As they lack the ability to articulate the how and why in in any real detail and tangible meaning (which includes explaining the trade-offs), how are the great unwashed able to interpret the situation for themselves?
If people understood that they're ultimately the losers in terms of their monetary savings and value of labor, these clowns would be challenged better. Politicians and media do not challenge of behalf of the people - either their understanding is too limited or they're protecting their self interests. Unfortunately I include the likes of Te Pati Maori and ACT - both of whom I believe should understand this much better.
Orr will keep things tight for too long and then panic and slash rates. Remember in November 2021 he was telling the Banks to prepare for negative rates. Mortgage lending is growing at just 2.9% and that is 100% driven by first home buyers. There is no demand push in the economy and Orr should be able to work that out.
Clearly things have actually been going wrong now in NZ for well over a decade, the way they measure inflation is obviously wrong and its an underestimation. Things have got totally out of whack and wages have simply not kept up. Not sure how much longer the RBNZ can keep up the charade but its getting more and more ugly out there if you are anywhere near the bottom of the heap.
I find it interesting that people on these comments think jobs are being destroyed because of a "delay" with RBNZ cuts when actually the opposite is true.
Hard working kiwis are having their purchasing power destroyed the longer we wait for inflation to return to below 3%.
The RBNZ has been far too slow to react and any national tax cut will never help to fully compensate for the loss in purchase power.
The target used to be 0-2% not 1-3%. Infact I think the target should be 0%.
Sticky inflation will continue far longer than everyone assumes, and don't write off a possibility of further increases in mortgage rates. We could repeat the 1970's and this inflation battle may not be as transitory as the RBNZ thinks.
Um ... The latest quarterly inflation figure suggest annual inflation is likely around 2%.
But hey. Love your story.
I just think it's 12 months (or more) out of date.
Parts of your story are completely correct, e.g "The RBNZ has been far too slow to react ", but that too is about 2 years is, (or 3 years if I was honest) also out of date.
Can you explain why you say, "Infact [sic] I think the target should be 0%".
There are many reasons why it's not. But not all are good ones. But I'd be interested in yours. Thanks.
The way things are going hardly any will be solvent to take advantage of the next potential upturn from 2025/2026.
It’s a key reason why I am moderately bullish for house prices post-2025. I think supply will fall off a cliff from mid 2024, potentially for several years. And when interest rates start coming down meaningfully, demand will be reignited.
Orr went hard initially which I agreed with. Now he should cut. He will wait far too long.
The Central Bank should be cutting rates while Luxon providing some tax relief. Albeit token.
Australia is way ahead of us again…
It's high time Government got off their backsides and dealt with the productive economy. Too many deadbeats being supported by those in the middle. This is driving up costs materially. Along with rampant crime. Poorly maintained infrastructure. Inefficient Council, and Government. Domestic inflation is appalling. This is the price we pay for bad Government.
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