Reserve Bank (RBNZ) Governor Adrian Orr says the central bank ultimately not lifting the Official Cash Rate (OCR) as high as its near 4% forecast in the current tightening cycle is "a very plausible outcome."
On Wednesday the RBNZ increased the OCR by 50 basis points to 2%, and forecast it will rise as high as 3.9% by June of next year.
However, in an interview on Bloomberg TV, Orr was asked if it was possible the OCR peak could be significantly lower, 3.5% or even lower, because the RBNZ successfully slows the economy.
"That is a very plausible outcome. That would mean that we have to do less work to get the same outcome we're after, which is to have inflation return back to that 1% to 3% target range," Orr told Bloomberg.
"Likewise there are plausible stories where inflation expectations become unanchored and more persistent and that means there's even more work to do for us in the future. So we need to balance those two stories."
"Our central projection is one where we achieve our inflation [target] with interest rates only being modestly above what we would consider a neutral level, and holding it there for a relatively brief period really over the next 12 months or so. And then over time, as we get that better balance, we can take interest rates more back to neutral," Orr said.
"The biggest thing that has changed in recent times is our own risk appetite. We believe that the worst outcome that we most want to avoid is one where inflation expectations become persistent. And that means that we have to slow demand considerably and have unnecessarily high unemployment to get inflation back to that level. We'd far prefer to do what we're doing now, a significant stitch in time to avoid that process of having done too little too late."
Orr also told Bloomberg that the RBNZ's Monetary Policy Committee starts from scratch each time it reviews the OCR, every six weeks.
"We look at the data, how is it performing relative to what we were anticipating, and then recalibrating what we need to do. We've got time, it's a repeat game," he said.
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