Reserve Bank 'not in a great place' with inflation
Tuesday, 19 April 2022
Reserve Bank governor Adrian Orr has admitted the bank is “not in a great place” with inflation, ahead of new numbers due on Thursday that could see inflation jump above 7 per cent.
Speaking to the International Monetary Fund, Orr said the challenge now faced by all central banks was to constrain inflation expectations “without creating a recession”.
The Reserve Bank raised the official cash rate by 50 basis points to 1.5 per cent last week in a bid to head off inflation.
But Orr appeared to suggest a changed approach to government spending might also be helpful, saying the Reserve Bank would need “support” to achieve its goals.
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“We are going to have to be very clear with our fiscal authorities around what we are doing and how they could assist with more targeted, effective fiscal policies,” he said.
Westpac is forecasting that Stats NZ will report a 7 per cent annual jump in the consumer price index, when it reports inflation figures for the three months to the end of March on Thursday.
Prices would have jumped 1.9 per cent in the March quarter alone, it predicted.
National Party finance spokeswoman Nicola Wills homed in on Orr’s comments on fiscal policy and said Finance Minister Grant Robertson needed to heed what she described as Orr’s “warning”.
“He must do his bit to remove inflationary pressure in the domestic economy: stop adding costs to business, quit wasteful spending and remove bottlenecks to productive growth,” she said.
“This is absolutely not the time to put fuel on the fire with the biggest Budget spending allowance in history, which he has foreshadowed for his May Budget.”
Robertson noted on Tuesday morning that some commenters were forecasting annual inflation would peak in the second quarter of this year and that inflation had climbed above 8 per cent in the United States and Britain.
“This is a global phenomenon. It is driven by supply chain constraints, he impacts of Covid, the war in Ukraine … this is something the whole world is dealing with,” he said.
“I acknowledge this is a challenging time for many people but it is hard to come through a ‘one in 100 year’ economic shock caused by Covid without some impacts.”
Orr said the challenge of bringing down inflation was a familiar one but the “background and setting is unique”.
The bank had to meet its mandate to maintain low and stable inflation and its employment mandate “in the context of a large evolving severe health shock to the global economy exacerbated by the Russian invasion of Ukraine,” he said.
“It is an incredibly uncertain environment. There are an unbelievable number of continued economic shocks.”
While talking tough on inflation, Orr also emphasised the Reserve Bank was involved in a balancing act.
He reiterated that the 50 basis point rise in the OCR last week was “more about doing it sooner rather believing we had to do more”.
That message had led BNZ to label last week’s interest rate rise as a “dovish hike” and to a large extent mitigated the impact of the ‘double’ rate hike on financial markets.
“It is just getting on with it so that people can understand what we are about,” Orr said.