Inflation Today Is Not Like the 1970s, RBNZ Governor Orr Says
Inflation is a very different beast today than it was in the 1970s, giving central banks the confidence to look through a short-term spike in prices, Reserve Bank of New Zealand Governor Adrian Orr said.
“The fear of the 70s, the 80s, stagflation, it is such a different world,” Orr said in an interview with Bloomberg Television on Friday. “There is a single global price for so many of the raw materials, the intermediate inputs and the final consumer goods. We google that, we are prepared to wait. We don’t go to the shop, we have it imported.”
Central banks today are therefore “prepared to wait longer because they’re more confident that we have stable inflation expectations, we have a much more flexible set of pricing, we have less of that generalized inflation,” he said.
Fears that faster inflation could prompt central banks to start removing monetary stimulus have gripped global financial markets in recent months, even as policy makers insist the pandemic-induced lift in prices is likely to be temporary. The RBNZ this week became one of the first to project it will start raising interest rates next year, though Orr cautioned that was still some time away.
“We’ve become more confident around a central projection, and that projection is one where we see inflation pressures finally normalizing and one where we can hopefully be normalizing the level of interest rates back to a more neutral level,” he said. “There’s a long time between now and the middle of next year. But that’s our best foot forward at this point.”
While some of the extreme downside risks have abated as vaccines are rolled out globally, and economic conditions are improving, there’s still the chance of setbacks, Orr said. He cited the current seven-day lockdown in the Australian state of Victoria, which has forced a pause in quarantine-free flights between Melbourne and New Zealand.
“What it does is it really holds back the ability and the willingness to travel and to be a tourist, which is a big part of our revenue here in Aotearoa New Zealand,” Orr said.
The RBNZ also needs to see how more indebted households react to the threat of higher interest rates, he said.
Asked if it is problematic to be ahead of other central banks in tightening policy, given that it could drive up New Zealand’s exchange rate, Orr said the RBNZ has to focus on managing its own economy.
“How and if we get ahead of other central banks, well there’s a lot of water to go under the bridge there,” he said. “The financial markets, exchange rates in an economic sense should be reflecting relative inflation differentials and relative productivity differentials, and there’s not a lot of divergence globally between that because of the common economic shock we’ve all received.”
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