(Bloomberg) -- The New Zealand central bank’s latest projections imply it will slow the pace of easing and likely incorporate pauses into the cycle after a third straight half-percentage point cut in February, Assistant Governor Karen Silk said.
“There could be pauses built in, but it is definitely a slower track after February,” Silk told Bloomberg News in an interview Thursday in Wellington. With inflation projected to pick up to 2.5% next year, monetary policy needs to remain mildly restrictive to “keep some pressure” on price-setting, she said.
The Reserve Bank lowered the Official Cash Rate by 50 basis points for a second straight meeting yesterday, taking it to 4.25%, and Governor Adrian Orr said another 50-point move is likely at the next decision on Feb. 19 provided the economy evolves as expected.
The New Zealand dollar and bond yields rose after the decision, which Silk put down to markets expecting a more dovish rate track from the RBNZ.
The central bank is still trying to damp inflation and price-setting behavior, she said, adding its projections show the cash rate falling to a neutral level but not below, as policymakers currently see no need to stimulate the economy.
“I would say that we’re getting close to the long-term neutral rate by the end of the forecast period,” Silk said. “By the end of 2025 we might be getting a little bit closer to where we might see the short-term neutral rate today. It’s not showing that we go at any point on that curve below neutral.”
The RBNZ projects the cash rate will drop to around 3.5% by the end of next year and to about 3% by the fourth quarter of 2027, the end of the forecast period. Investors see the cash rate dropping to 3.25% in October next year and not any further, swaps data show.
The bank’s 125 basis points of easing in the past three months make it one of the most aggressive rate cutters in the western world, but Silk said the pace was not a reflection of any internal concern that the RBNZ may have over-tightened.
“We’ve got the ability to unwind at the pace that we have in part because tradables inflation has fallen more quickly than we originally thought that it would,” she said. “And that negative output gap that exists today, that spare capacity in the economy, is doing the job.”
Asked if monetary policy ideally should move more gradually in order to smooth the business cycle and avoid booms and busts, Silk agreed but said “we have not been experiencing a normal business cycle.”
“No one could call Covid and the things that have happened externally that have had flow-on impacts into New Zealand a normal business cycle,” she said. “Think about the rapid pace that we had to do on the way up as well.”
However, Silk said there was no case for the bank to have cut by 75 basis points yesterday — a possibility markets had given some credence to.
Such as move would imply the bank was seeing “a significant shock,” Silk said.
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