RBNZ’s silk sees upside risks to inflation outlook

RESERVE Bank of New Zealand (RBNZ) assistant governor Karen Silk said there are still upside risks to the inflation outlook and the forecast peak in the bank’s cash rate is “not set in stone”.

“This is still an economy that has excess demand, a tight labour market, and as a consequence both headline inflation and core inflation at levels that are well outside the (target) band,” Silk said in an interview with Bloomberg News on Friday (Feb 24) in Wellington, adding that short-term inflation expectations are also too high. “So there’s still more work to do here.”

The RBNZ this week raised the Official Cash Rate (OCR) by 50 basis points to 4.75 per cent and projected it will need to rise to a peak of 5.5 per cent later this year to bring inflation back within its 1-3 per cent target band over the medium term.

The hike was a step down in the pace of tightening after a 75-point move in November, but Silk wouldn’t be drawn on whether a further slowing could come at the next policy meeting in April.

“All levels are on the table for discussion at every meeting,” she said. “I’m not going to turn round and comment on whether we would be looking at 25, 50 or 75, they will all be on the table for discussion and they will depend on the information at hand.”

A pause in tightening is “certainly not something that we’re contemplating at this point in time”, she said.

Silk said the RBNZ is “taking a little bit of comfort” from the fact that indicators had evolved largely as it expected since November.

But the outlook is still subject to uncertainty and shocks — a good example being the recent cyclone that devastated large areas of the North Island.

Asked about the balance of risks to the inflation outlook, she said the bank’s forecast OCR peak has some upside risk built into it.

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However, “without building that in, any variation to that peak would have been still at the margin”, she said. “There’s potentially still some upside risk on the fiscal side of it. They’ve got a significant job to do in terms of the reprioritization even without the impact of this, so let’s just see how it plays out over the next six weeks.”

Silk said the RBNZ’s central projection is based on the information at hand today.

“We will do what we need to do to get inflation back under control,” she said. “As more information comes to light, we will continue to review our position.” BLOOMBERG