Reserve Bank Governor Anna Breman is encouraging businesses that can "see through" temporary cost pressures to do so, rather than increase prices, and says if the central bank sees a wage-price spiral emerging "monetary policy will have to react."
Breman was speaking to media in Auckland on Tuesday, where she's giving a speech on the shockwaves impacting the New Zealand economy, including surging fuel prices, due to war in the Middle East.
Asked about discussions with businesspeople, Breman said Reserve Bank staff listen very carefully.
"There are lots of differences. Some businesses are doing well and have been doing well for some time. Some businesses are struggling in this environment and they will be facing higher cost pressures. And I think the key message is that for those businesses who have the ability to see through temporary cost pressures, that would be really welcome in the longer run," said Breman.
"But again, it's up to each and every business to make their own decisions."
She noted that surging fuel prices, and other rising input costs such as fertiliser, means some firms are facing "somewhat higher cost pressures."
"So we'll be looking into whether they pass on those costs to consumers or whether they expect to absorb them because they expect this to be passing over the medium-term," Breman said.
"But importantly that's what we call first round indirect effects. But very importantly we will also watch out for what we call second round effects. So that is if we see anything that threatens inflation expectations to become de-anchored, or if we see a wage-price spiral ... if we see that then monetary policy will have to react to stop that from happening."
A wage-price spiral is a scenario where rising living costs lead to workers seeking higher wages, increasing business labour costs and causing further price increases in a self-fulfilling manner.
Breman said the Reserve Bank is "looking very carefully" at inflation expectations and the price setting behavior of businesses.
The Reserve Bank's key monetary policy tool is the Official Cash Rate, which is currently at 2.25%. The latest official inflation figures, Statistics NZ's Consumers Price Index, showed annual inflation at 3.1% in the December quarter, just above the Reserve Bank's 1% to 3% target range.
A Reserve Bank survey of businesses released in February showed the mean expectations were for inflation in two-years' time to be at 2.59%.
Asked whether she had any concerns that stagflation might emerge, Breman said she doesn't at this stage. Stagflation is when an economy is stagnating and there's high inflation, which can lead to rising unemployment.
"I don't have [stagflation] concerns right now. What we do expect is some higher near term inflation and somewhat weaker growth. But we still expect the economy to grow this year. And again if this supply disruption, so the higher oil price, turns out to be temporary, I do expect to see really decent growth later this year," Breman said.
"But in the near term I think we'll see households, and maybe some firms, being a bit more cautious."
Asked what the medium-term means to the Reserve Bank, Breman said about the next 18, 24 months.
"There's no exactness in that. Say, over the coming two years."
The Reserve Bank is next scheduled to review monetary policy on April 8. Breman said the Reserve Bank will comment in more detail about the inflation outlook then, and its next Monetary Policy Statement on May 27 will include a full set of forecasts.
14 Comments
Why do they bother. Every business should increase their price whenever they can, you'd be stupid not to just because the RBNZ says so.
So after two years of recession and staff getting hammered by inflation....do nothing and hope you dont go broke. Yeah right...tui.
Yip - and if there was even a sniff of delfation (but not even any measured deflation like in 2020) there would be emergency interest rate cuts and QE going on.
And yet, if the value of our incomes is going to be wrecked by inflation >3%, outside their mandated band, its a cautious cautious approach and buying power is destroyed and living standards drop.
The bias is completely bizarre. Inflation that destroys living standards is fine, but deflation that might improve living standards (when you can buy more for your wages) must be destroyed immediately.
It would appear that the current central bank mandate is to destroy living standards (incomes vs inflation) while protecting the retail banking sectors ability extend debt against the housing market (making sure deflation never scratches their golden goose).
Well expressed. Even during the Japan lost decades, many people in society actually did reasonably well out of deflation. Those were typically lower income / middle income people.
Even though their incomes were flat to falling, the cost of everything else fell significantly. For ex, paying 500 yen for 20 envelopes became 100 yen for 50 envelopes. The purchasing power of their incomes and savings got stronger (unlike the Anglosphere, Japan [and China] value savings).
Businesses emerged like Uniqlo and Daiso, the incredible company that was pricing everything at 100 yen at a remarkable level of quality.
Was this good for Japan? In some ways yes. In some ways no. They had to adapt to their circumstances.
Would Aotearoa be able to replicate what Japan did? Most definitely not. We don't have the know-how that the Japanese had across business sectors, particularly in the productive sectors.
Yeah and their corps has access to cheap funding hence like purchase of Frucor, but it does not work so well when everyone is screwed everywhere, and assets are 100% over valued... EVERYWHERE.
I knew this was coming:
1. 'Look Through' the inflation spike. 'its just a blip'.
2. 'Don't increase wages and salaries, otherwise you selfish people will create a spiral'.
3. Oh, there's another blip next period? Go back to 1.
Difference now is that we have a reasonable level of unemployment to keep a lid on wages. Demand all you like, but if there's plenty of others willing to work for cheaper or the same, you become more expendable. Job security is key in times of economic downturn and high unemployment. Better get me a few extra brews done to park some coin and host a few pot lucks!
A wage/price spiral.!Spare me the spin from this outfit. There will be no wage spiral, there will certainly be a price spiral.
Well said!
AI will fix any chance of a wage spiral
Its yet to hammer a nail, arrest a drug deal, wipe an old person bottom etc. Yes lots of white collar jobs will go or have opportunity severely degraded.
So you agree there will be a price spiral but you don't think the RBNZ need to raise rates?
Worried bout inflation?...There are two ways to destroy money
Will voters See through this.... or vote TPM the Greens and that other dodgey party in?
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.