Adrian Orr suggests Reserve Bank 'incredibly worried' about inflation

Thursday, 24 February 2022

Reserve Bank governor Adrian Orr has appeared to admit the central bank is now “incredibly worried” about higher inflation, despite last year forecasting it was likely to subside quickly when Covid-related supply chain problems ease.

Appearing in front of Parliament’s Finance and Expenditure select committee on Thursday, Orr stepped up the rhetoric on inflation while defending suggestions from Opposition MPs that it should have gone harder by applying higher rises in the official cash rate.

Responding to a comment from National Party finance spokesman Simon Bridges that the market had viewed its latest monetary policy statement as “hawkish”, Orr said “what you are saying there, really, is that the market is saying ‘well, the Reserve Bank is incredibly worried about inflation and they are signalling higher interest rates’ and that is correct”, Orr said.

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On Wednesday the Reserve Bank raised the official cash by 25 basis points to 1 per cent and dramatically raised its forecasts of future rates.

But the bank is forecasting annual inflation will fall below back 3 per cent by June next year after peaking at about 6.6 per cent in the current quarter.

Orr said the Reserve Bank had “a very clear path of interest rate rises outlined ahead of us”.

“We [had] projected that the official cash rate would be around 2½ per cent at its peak; we are now saying it will be north of 3 per cent at its peak.”

Those projections had been priced-in to retail interest rates “so already the projected tightening is underway and being imposed”, Orr said.

“On the current level of inflation, without doubt it is too high.”

Orr said about 675,000 households could expect an average increase of $16 a week in their mortgage payments as a result of a 25 basis-point rate rise, but there would be “unders and overs”.

“There'll be those people who are very recent buyers and will have a very high level of debt relative to their income, and they will find that additional cost harder.”

Defending the Reserve Bank against an accusation from Bridges it had misjudged the likely track of inflation right up until towards the end of last year, Orr said monetary policy was “a mix of science and ‘art’ and there are massive uncertainties involved”.

But the central bank was the first to halt quantitative easing and one of the first to start to raising interest rates, he said.

“It's a real balance between doing too much too soon or too little too late. I'd like to think we are in a very good position here in New Zealand.”

The Reserve Bank signalled on Wednesday that a further deterioration in Russia’s intentions towards Ukraine could be expected to result in higher inflation and hence higher interest rates.

The imposition of significant sanctions would be likely to push up the price of a range of global commodities including oil, gas, wheat and many metals.

Orr qualified the central bank’s commentary by acknowledging in a media conference that the situation could impact global demand and well as supply.

“Our job is to work our way through what matters for us here in Aotearoa, New Zealand, on net balance on inflation through time.

“At the moment, there are clear one-off price impacts of the uncertainty, being primarily the global oil price,” he said.

“We need to be aware of what that means for near-term measured inflation, but more importantly, longer term inflation impacts.”