Orr Says Next RBNZ Meeting ‘Live’ Even if Outbreak Persists
(Bloomberg) -- New Zealand central bank Governor Adrian Orr gave the clearest indication yet that policy makers plan to raise the official cash rate at their next meeting, even if there are still cases of Covid-19 in the community.
“Of course October is a live meeting,” Orr said in an interview Friday on Bloomberg Television. Covid cases alone would not prevent the Reserve Bank from tightening policy, he said, adding it would take “a significant shock to demand” to change that view.
“What we’ve learned through time is that incomes remain strong, demand bounces back very quickly, and that these rolling lockdowns will continue for a while,” Orr said. “We have to focus very much on our purpose, which is of course the inflation and employment mandate that we have.”
The RBNZ this week delayed the start of a tightening cycle after the government put the country into a lockdown to contain an outbreak of the highly infectious delta strain of the virus. That prompted investors to pare bets on a rate increase at the Oct. 6 policy meeting, with markets currently pricing less than a 50% chance of a move.
Orr said the RBNZ decided not to act this week given the health situation, but the underlying economic outlook remains the same. There are significant capacity constraints, one-off price spikes, supply disruptions, and employment is above its maximum sustainable level, he said.
Unemployment has tumbled to 4% and inflation has surged to 3.3% -- the first time it has exceeded the RBNZ’s 1-3% target band since 2011.
“We have the official cash rate back at neutral over the course of next year, which is 2% compared to 0.25% now,” Orr said. “What would push us off that course? We would have to be very convinced that the supply side has suddenly been able to respond, removing inflation pressures, or the demand side for the economy has had a significant turnaround, and that would mean fiscal policy is not doing its job.”
Orr said the “single worst thing” that could happen would be for inflation expectations to become unanchored and move “well north of the midpoint of our target band.”
“To date, we have been very confident they are well anchored -- they’re anchored because the markets expect central banks to do their job,” he said. “So we need to have the confidence to do our job. That’s what we’ll be doing will interest rates.”
Orr was unperturbed about becoming one of the first central banks to begin tightening policy in the wake of the pandemic.
While being a first mover might see the exchange rate “appreciate a little bit,” overarching global uncertainty was keeping currencies “pretty contained,” he said.
Asked about the possibility of having to reverse course after embarking on a tightening cycle, as previous RBNZ Governor Graeme Wheeler needed to do in 2015, Orr said there’s no such thing as certainty when it comes to monetary policy.
“Fortunately I’m old enough to have made every policy mistake known,” he said. “I’ve been accused of being too slow, too fast, too aggressive, too timid. I don’t think looking back at whatever the last policy challenge was gives you much insight into the next.”
“There will always the unknowns, there will always be the hindsight genius, but we need to continue to move, we cannot wait for certainty, that does not exist,” Orr said.
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