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RBNZ needs to look the inflation beast in the eye

Reserve Bank chief economist Paul Conway has warned that imported inflation could become persistent.

Wednesday, October 26th 2022, 8:32AM 2 Comments

by Eric Frykberg

Conway said inflation was the “monster” and the bank “needed to look the beast in the eye.”

His comments come as the bank prepares to lift the official cash rate again and economists have recently increased their forecasts for the peak OCR this cycle.

Conway said that last week's 7.2% inflation jump was a lot higher than the Reserve Bank's own forecast of 6.4%.

He blamed both tradable and non-tradable inflation, saying domestic inflation came in at 6.6%, largely driven by construction costs and council rates. And that was similar to the RBNZ's forecasts.

But he conceded the RBNZ got it wrong on imported inflation, and thereby lay danger.

“Inflation coming in over the border was 8.1%, where we were expecting 6.5%,” he said.

And this was a problem, because it meant a useful ally in the fight against inflation was slipping away.

“Tradable inflation is usually our friend,” Conway said.

“Over recent decades it has been low to negative, across the globe.”

Conway's argument was that low or non-existent price rises overseas would help pull down the inflationary average within New Zealand.

He added there were reasons for several years of low international inflation, such as globalisation, favourable demographics and high level, low cost production within China.

“But much of that is changing, in the first instance because of the pandemic,” Conway said.

“But also, globalisation is changing, demographics are changing and China is not the deflationary force it once was.

“There is talk, in serious academic papers, arguing that greater international inflationary pressure could be a theme going forward.

“It hopefully will not be as extreme as what we have been witnessing over the past year or so, but that era of helpful tradable inflation may be coming to an end.”

Conway listed several positives for New Zealand, such as high employment and strong household budgets, as people paid back debt during the pandemic.

And despite the dangers from imported inflation, he was hopeful that inflation might have peaked.

“In no small part, monetary policy works,” he said. 

He was speaking to the Commonwealth Bank Global Markets Conference in Sydney by Zoom from Wellington.

Tags: Reserve Bank

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Comments from our readers

On 27 October 2022 at 8:04 am Murray Weatherston said:
Its a pity they didn't take the potential monster into account when they determined to run an effectively 0% OCR for so long, and to print so much money to support the Governemnts huge fiscal injection in 2020-2022.
I wonder whether RBNZ would be prepared to proctively release their internal research and discussions about the likely and potential inflationary effects of their deliberate policy choices.
Its ironic that the Bank and the Governemnt who at least faciltated and probably caused the burst of inflation (actually like many other central banks and Governemnts around the world) are now grasping to contain the monster they created.
On 27 October 2022 at 8:45 am Bikedude said:
Murray, Im not sure our Political Masters fully understand what and how they caused it, so grasping to contain it is a very apt term.

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AIA - Back My Build 5.44 - - -
AIA - Go Home Loans 7.99 5.99 5.69 5.69
ANZ 7.89 6.59 6.29 6.29
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 5.99 5.69 5.69
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BNZ - Mortgage One 7.94 - - -
BNZ - Rapid Repay 7.94 - - -
BNZ - Std 7.94 5.99 5.69 5.69
BNZ - TotalMoney 7.94 - - -
CFML 321 Loans 6.20 - - -
CFML Home Loans 6.45 - - -
CFML Prime Loans 8.25 - - -
CFML Standard Loans 9.20 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 5.79 - -
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Owner Occ 7.65 5.99 5.75 5.69
Co-operative Bank - Standard 7.65 6.49 6.25 6.19
Credit Union Auckland 7.70 - - -
First Credit Union Special - 6.40 6.10 -
First Credit Union Standard 8.50 7.00 6.70 -
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Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society ▼8.60 6.75 6.40 -
ICBC 7.49 5.99 5.65 5.59
Kainga Ora 8.39 7.05 6.59 6.49
Kainga Ora - First Home Buyer Special - - - -
Lender Flt 1yr 2yr 3yr
Kiwibank 7.75 6.89 6.59 6.49
Kiwibank - Offset 8.25 - - -
Kiwibank Special 7.75 5.99 5.69 5.69
Liberty 8.59 8.69 8.79 8.94
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Pepper Money Easy 8.69 - - -
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SBS Bank Special - 6.15 5.69 5.69
SBS Construction lending for FHB - - - -
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SBS FirstHome Combo 5.44 5.15 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.75 - - -
TSB Bank 8.69 6.49 6.49 6.49
TSB Special 7.89 5.69 5.69 5.69
Unity 7.64 5.99 5.69 -
Unity First Home Buyer special - 5.49 - -
Wairarapa Building Society 8.10 6.05 5.79 -
Westpac 8.39 6.89 6.39 6.39
Westpac Choices Everyday 8.49 - - -
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Westpac Special - 6.29 5.79 5.79
Median 7.99 6.02 5.79 5.69

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