RBNZ's Silk: Interest rates not needing hike yet, but inflation pressures rising soon
Reserve Bank of New Zealand (RBNZ) Assistant Governor Karen Silk said that the central bank is yet to see medium-term inflation pressures emerge, but it’s prepared to respond aggressively if they appear, Bloomberg reported on Friday.
Key quotes
There’s no early signs there at the moment of that this is definitively going to flow into really strong second round effects.
If the data turned round and showed that there were definitive second round effects coming through, this was going to get an awful lot worse, then you always keep that option open.
No need to await quarterly CPI data to act, must adopt more forward-looking approach.
Interest rates not needing hike yet, but inflation pressures rising soon.
Middle East conflict may cause lasting damage even if it ends quickly.
Reviewing high-frequency data for July decision, bias leans toward rate hikes in upcoming meetings.
Market reaction
As of writing, the NZD/USD pair is up 0.69% on the day at 0.5942.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.
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