Central bank confident it can ride out near-term bump in inflation

Sunday, 2 March 2025

Local government rates and electricity are two stones in the central bank’s shoe as it celebrates return to normality.

The Reserve Bank needn’t be too concerned about an uptick in inflation early this year, unless that starts impacting people’s expectation of future inflation, according to the bank’s chief economist Paul Conway.

Even it was concerned, it would be too late to do much about it anyway, he told The Post.

Chewing over the bank’s February monetary policy statement and its decision to lower the official cash rate by 50 basis points to 3.75%, Conway reiterated its confidence monetary policy was on the right track.

The bank’s latest forecasts see inflation rising from its last-reported level of 2.2%, to reach 2.4% in the current quarter before climbing to 2.7% — close to the top end of the bank’s target band in the three months to the end of September.

“There are still persistent inflationary pressures in the New Zealand economy,” Conway said.

Domestically-drive inflation was coming down but in some parts of the economy it was still too high, he said.

Local government rates and electricity were two of the culprits.

Higher power bills will soon start to show through in the inflation figures.

Some of the country’s largest power firms have been pushing through price rises close to 10%, in part in response to higher regulated lines and transmission charges that are intended to reflect the impact of past high levels of inflation.

Such increases might be “one-offs” but could tend to linger, Conway said.

“Where the monetary policy committee sits, is that because inflation expectations are ‘glued’ to 2% at the moment — so people expect inflation to be 2% over the medium term — our framework is resilient to ups and downs in inflation over the short term.

“So we are feeling confident we can look through that near term inflation spike, and in fact there's nothing we could do about it anyway. Changing interest rates now isn't going to affect that, given the long and variable lags of monetary policy.”

The Reserve Bank might get concerned was if it saw inflation expectations edge up off the back of that inflation spike and get entrenched into people’s beliefs and behaviours, Conway said.

The worry would come if firms thought it was a good time to put through a price rise or if workers thought it was a good time to “sneak through” a pay rise.

“Then that short term blip in inflation does start to push into the future and into the window that monetary policy can do something about. But currently, we're not seeing that.”

A smattering of fresh data late last week appeared to give some support to the Reserve Bank’s separate contention that a modest economic recovery might now be underway.

ANZ reported on Thursday that business confidence inched up in February, with a net 58% of businesses it surveyed now expecting better times ahead — though a net 3% reported that their own activity had fallen.

Although the Reserve Bank is expecting official unemployment to tick up to 5.2% in the current quarter and remain at that level until mid-year, jobs site Seek reported that the number of vacancies advertised on its website rose 4% in January.

That was the largest increase in five months, country manager Rob Clark said.

But, again, there was a caveat.

“It is a bit too early to say that volumes have stabilised,” Clark said.

“We do expect more optimism among hirers at the start of the year and this month’s numbers may be more a sign of a return to business after the summer break, than a longer term trend,” he said.