New Zealand’s Deputy Governor Karen Silke said the central bank has not yet seen signs of medium-term inflationary pressures, but if such pressures emerge, the bank is prepared to take proactive measures.
“There are currently no signs that this will necessarily generate a strong second wave effect,” Silk said in an interview with Bloomberg on Friday in Wellington. “So the question then becomes when growth will begin and to what extent the slowdown can offset medium-term inflationary pressures?”
Investors are betting that the Reserve Bank of New Zealand will have enough data at its next meeting in July to launch a tightening cycle, with an initial 25-basis-point rate hike. Most economists share this view.
Silk said all options would be on the table, including a more aggressive 50-basis-point rate hike.
“If the data reverses and shows that the second wave effect has already emerged, causing a sharp deterioration in the situation, we will always retain this option,” she said. She also noted that if the data supports it, a decision to maintain the current status quo could be made.
Silk said that although she does not want to raise interest rates this week and may be labeled “dovish,” all six members of the committee agree on the need to increase rates at the upcoming meeting, and they also endorse the released guidance indicating that the average official cash rate will rise to 3% by early next year.
She said, “Monetary policy stance depends not only on the actions taken at any given moment. Forward guidance is equally important. And I believe, at least from my perspective, forward guidance helps ensure that inflation does not become entrenched.”
This week, like Brainard and chief economist Paul Conway, Silke favored keeping interest rates unchanged, while three external members of the committee wanted a rate hike. She said this split between internal and external members was purely coincidental.
I have indeed seen it at other meetings, and the perspectives from both internal and external sources are truly diverse.
One external member, Carl Hansen, told the newsroom that he supported the pay raise because it would provide a degree of predictability and gradualness, rather than delaying too long and then having to make a large leap across the OCR.
“The current environment is highly uncertain, and I don’t think this uncertainty will disappear anytime soon,” Hansen told the news agency. “If interest rates remain at 2.5% from today, it would be easier to decide whether to keep them unchanged or raise them by another notch in July.”
Silk said she made this decision after considering the following factors: spending is slowing, there remains substantial idle capacity in the economy, and rising housing loan rates have already led to tighter financial conditions. She also noted that the prospect of an increase in the official cash rate (OCR) would further intensify this tightening.
