(Bloomberg) -- New Zealand’s central bank wants to see wage and price setting continue to decline as it decides the appropriate pace of future interest rate cuts, Assistant Governor Karen Silk said.
“We continue to see that decline in price setting and wage setting behavior,” Silk said in an interview Friday in Wellington. “That’s really important. If that corrects itself more quickly, then obviously there’s an opportunity for us to think about cutting rates on a path that’s different. Likewise, it could do the reverse as well.”
The RBNZ this week began its easing cycle much earlier than previously signaled as the economy slumps and inflation slows. The central bank said a drop in inflation expectations, and the way firms were starting to curb price rises and negotiate smaller wage increases, were key reasons it had the confidence to cut now rather than wait for more data in the fourth quarter.
Policymakers lowered the Official Cash Rate a quarter point to 5.25% and projected a path that takes it below 4% by the end of 2025. Investors are pricing another 75 basis points of cuts across the two remaining reviews this year, but Silk reiterated the RBNZ is taking a “measured approach” and that is appropriate at this point in time. It will remain data dependent, she said.
While the Monetary Policy Committee did consider a 50 basis point cut this week, Silk said she wouldn’t put any weighting on that as regards future moves, because the data may signal more or less inflation pressure than is currently expected.
“There’s still some uncertainties sitting out there,” she said. “You’ve got low productivity and in this market that can limit the potential output of the economy. So if you started to see growth coming through, does that mean that inflationary pressure builds quicker?”
Still, the RBNZ’s core outlook for the economy is much weaker than its previous projections in May. It now sees a 0.5% contraction in the second quarter this year followed by a 0.2% decline in the third quarter — the third technical recession in less than two years. Silk said that’s the price the economy needed to pay to deliver a return to the midpoint of the 1-3% inflation target.
“What we are targeting is getting inflation back,” she said. “We’ve been really clear from the start that was going to mean that you would have to have an extended period of contraction in the economy.”
Some economists have argued this week’s decision was too much of a policy shift after the RBNZ’s hawkish approach in May when it discussed a rate hike and pushed out an expected cut to the second half of 2025.
Asked whether the third recession could have been avoided had policymakers taken a more neutral stance in May, Silk defended the stance.
“The information that was available to us indicated there was continuing persistence in domestic inflation,” she said. “Yes, we were starting to see some softening in the economy but that was largely in line with what we had expected to see, and we were in a pre-budget situation where tax cuts were on the table.”
By the July review — when the RBNZ said the level of policy restraint will be tempered over time — and certainly by August, the evidence was there that demand had slumped.
“We were starting to see a greater level of decline in net migration coming through, fiscal restraint was starting to flow through and house prices were weak and are getting weaker,” Silk said. “It’s a combination of all of those things. The telling point for us was that it was a consistent set of data.”
(Updates with comments on economy from ninth paragraph)
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