Reserve Bank economist gives no sign it’s about to rethink interest-rate stance

Tuesday, 30 January 2024

Reserve Bank chief economist Paul Conway has effectively brushed off weaker economic data reported by Stats NZ in December, indicating it didn’t have any obvious implications for the bank’s own battle to bring down inflation.

Conway also indicated recent immigration and inflation data were a mixed bag, giving no clear indication that any developments since its last monetary policy statement in November had caused it to rethink its view on where interest rates might go.

Kiwibank chief economist Jarrod Kerr said on Monday that it was time for the Reserve Bank to do away with threats of hikes and start pivoting towards lower interest rates.

But Conway’s comments, made during a highly-anticipated webinar, on Tuesday morning, did not suggest that process was under way yet.

The New Zealand dollar climbed about a quarter of a US cent to US61.4 cents during his talk, indicating traders did not view Conway’s comments as softening the bank’s stance.

Infometrics principal economist Brad Olsen said his initial take was that there was no evidence at all that the Reserve Bank wanted to lay the groundwork for a more dovish view that interest rates could fall sooner.

“Nothing screamed ‘we’re moving hard away from our view of higher-for-longer interest rates and are keen to embrace more cuts soon’.”

“In fact, [Conway] emphasised a number of factors that seem to support a strong stance on interest rates,” Olsen said.

The Reserve Bank warned in November that immigration could prove a spanner in the works bringing down inflation.

Its forecasts indicated it did not envisage the official cash rate falling below 5.5% before May or August next year and raised the possibility of one more rate hike before then.

However, weak GDP data released by Stats NZ the following month has helped persuade financial markets and analysts that interest rates will instead start falling later this year.

Stats NZ reported a surprisingly steep 0.3% drop in GDP in the September quarter.

Westpac calculated major revisions it made to its GDP estimates as far back as 2021 meant that by September the economy was 1.8% smaller than the Reserve Bank had thought it would be.

Reserve Bank governor Adrian Orr told a select committee in December that it was analysing the implications of the GDP data.

But Conway said during his webinar on Tuesday that although the weak numbers pointed to lower demand in the economy, it also suggested the productive capacity of the economy had also been lower than previously assumed.

“So the recent GDP revisions do not necessarily mean that capacity pressures in the economy are much lower than previously assumed,” he said.

He also noted that Stats NZ’s revisions were mainly due to it assessing that government expenditure had been lower in real terms than it had previously thought.

Demand in the private sector, which was more sensitive to interest rates, was mostly revised up, with “stronger consumption and business investment than first reported”, he said.

Echoing the bank’s previous comments on immigration, Conway said it was clearly helping to alleviate labour shortages in the economy but was also increasing rents.

While annual inflation had dropped to 4.7% in the December quarter, Conway noted that “non-tradeable” inflation — which reflects price movements in goods and services that are largely determined within New Zealand — came in higher than the bank had expected at 5.9%.

“Monetary policy is working. It is reassuring inflation is falling, but we still have a ways to go,” he said.

Those comments appeared to support a view among bank economists that the December-quarter inflation data alone would not be enough to prompt the Reserve Bank to change its stance on the future interest rates.

The big drop in overall inflation was mainly due to a reduction in the price of imports, but Conway said shipping problems stemming from the Red Sea conflict illustrated the risk that the bank “couldn’t rely on globalisation as much as we have in the past to achieve our inflation target”.

Conway said his comments were not intended to reveal anything about the likely future path of interest rates, which would be reviewed when the bank meets to determine its next monetary statement on February 28.