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Well The RBNZAID governor says a broad decline in CPI inflation is not happening across all sectors of the economy. The RBN said as I said yesterday, signaling that policy will stay tight for longer after keeping rays unchained for a seventh straight meeting. Johnny is now from Wellington is the LBNSAID Governor Arisunaal Governor.
Or.
It's always a pleasure to have you with us, and I know you'd been doing a lot of talking over the past twenty four hours or so, and I'm going to ask you for a bit more insight into that decision. And again, much like the last time we spoke, the possibility of further tightening was again flagged, particularly when it comes to you know, some of these elements that you've said domestically have been perhaps more resistant to monetary policy.
I guess the question would be, would another rate hike be meaningful when it comes to getting those aspects of inflation lower.
Another rate hike would only be meaningful if we sought inflation expectations we're getting away on us again starting to rise because of the persistence of actual inflation. We know that forward looking inflation is heavily influenced by the current level of inflation, So that's our main concern. You know, persistence raises the risks that expectations don't do the job that's needed. We know and we are confident that we will get inflation down to the one to three percent band.
We're just like to make sure we get there soon without risking that another blowout and expectations.
You talked about the risk appetite as a committee and that the asymmetry is the ability to withstand the risk of high inflation.
Right.
Do you see that increase risk with some of these elements that are leading through to kind of more difficult to shake inflation expectations.
Yeah, we're actually quite pleased.
We spend a lot of time in the document we produced yesterday really getting down to the nuts and bolts or the advice of what is left in that consumer price index, the bits that are persistent. We've seen a lot of success in getting the cost of housing construction down, a lot of other services prices down, goods prices.
You know, the easier to move. The bits that are left are insurance.
They've all got their own idiosyncratic story insurance premiums because of what's been happening globally around the extreme climate. We've got central and local government rates rises that are always lagged, and there's some indexation left in the economy which is keying off historical inflation. So you know, we're not surprised that getting from four to three to two is much harder than getting from seven and a half to four.
We are showing patients, but you know, we have to remain highly aware to any further upward price fikes in what that may meanful price setting behavior.
We've been trying to emphasizement, no continue, We've just been trying to emphasize that if price setters pull their heads in and except that we're going to be in a low inflation environment, wage expectations and actual wages have come down considerably, So you know, we're just working through this last part of the puzzle. No difference to effectively what you're seeing globally. Tradable goods prices fell very quickly, and then this home grond.
Domestic stuff is always more sticky.
And I get that that sort of non tradeables element is going to be crucial here as well, but you said that you have limited tolerance for inflationary surprises. To the upside is that patients kind of almost running out. Do you look at that second quarter CPI print as the one that maybe makes or breaks that decision to go again or not.
No, we're not hinged off anyone statistic, and no, patience hasn't run out.
What we are showing is that we've got a lot of patients.
You know, were projection is to keep the official cash rate at five point five percent until early next year. That we believe that will have inflation back down within the band, and at that point we can start thinking about normalizing interest rates.
That's all in our projection.
The sticky prices that I've talked about in particularly of the next couple of quarters have been well signaled and they are in our inflation projections.
So it'd have to be something over and above that again to really, you know, to surprise us.
And we think the risks are balanced over the period head that matters for us.
This time next year, you know, without doubt, the.
Economy is performing below its potential, an output gap is opening up.
Disinflation is occurring.
So you know, we feel pretty comfortable. But when you're starting from a higher inflation position when you've got low productivity, to central bank has to remain alert.
Do you think though that, given you are seeing those calling trends coming in and you're really getting that weaker or softer economic data now, even though you have that component where where non tradable inflation data is still elevated, do you think that there's that need to get inflation back to that target band first before cutting, given there is that lag transmission effect as well.
That's exactly correct, and in fact, our projections have US easing interest rates before inflation is back at that midpoint, because.
You are right.
You know, we have economic growth picking up here in New Zealand and our projections from this quarter onward, but the level of economic activity is still below the potential, so you know we can start to ease before for CPI inflation exactly, it's the midpoint of that target and that's what our projection has.
We're at two point nine.
I think our projections have us around two point nine percent the fourth quarter this year. You know, that's a toss of the coin whether it's in or out of the one to three band, and it's not soon after that that we signal.
Lower interest rates beyond that, So.
What did we do to surprise the market that it's not happening next week? And we've been saying that for some time.
You definitely do seem to have court a few investors on the hop over the past few months. But Governor you said that you expect growth to pick up. Where do you think that growth is coming from? And why do you think the New Zealand economy is able to cope with such a sustained period of elevated raids.
The growth is coming through from government spending, government investment. We are looking at private investment starting to come back, building consensus, et cetera of leveled out. And importantly, you know we've had a two percent perannum growth in our
working age population, so migration has been considerable. The really tough stuff is that aggregate demand has been rising per capita spend has been falling, and the difference is the population has been grown and so that has been putting the upward pressure on rents, on demand for dwellings, and that's picking construction activity back in the pipeline of infrastructure investment is in front of New Zealand is long and of course, the world has opened up again, so our
tourism is finding its feet and likewise, with global growth expected to pick up, our trade is also growing. So there's lots and lots of economic growth, but there is that rebalancing from consumption to production.
Governor some of the elements that you just talked about, dwellings, the supplies out of dwellings, rental cost rising. If there is a sharper than expected decline in immigration, would that meaningfully change your outlook when it comes to growth and does that more impact you know when it comes to the labor market side or when it comes to the inflationary demand side.
Do you think yes? So you know the real challenges. You can't just change one thing and leave everything else unchanged.
You know the type of scenario there with migration slowed much quaker, they're ager to get demand slows quaker in then we wouldn't be as exercised about the level of interest rates. So you know, when the facts change, your opinion has to change on the way through. But likewise, you know, we continue to have a dwelling shortage.
In New Zealand. It's not unique.
It's in these countries that have experienced rapidly high immigration, and we need to keep building dwellings, public state housing, public dwellings, private housing, so on and so forth. Housing construction costs have come right off. We've been successful at achieving that, but rental costs are high because there is still more demand than there is supply for people who don't own their own home but.
Want to rent.
Governor or very quickly before we let you go, you talked about fiscal spending as being one of the upside pressures ahead of the budget. Do you expect that tangent to continue to play out because we've seen across other economies where the fiscal side has inadvertently or not really undermined the effect of monetary policy.
Yes, you know, it's a global and forever challenge. The synchronized monetary and fiscal policy is extremely difficult. We've been fortunate here in New Zealand. Over the last couple of years. The government spending as a proportion of potential output has been declining, and that means it has been disinflationary. It has been helping the Reserve bank, it has been disinflating on the way through. That is still the expectation from the official projections to date.
Of course we'll wait to see what.
The budget has but you know, in the absence of that fiscal discipline, then yes, monetary policy would have more work to do.
And so you know, we're going to.
Have to see what, if any additional government spending restraint will be and the impact of tax changes.
Really great to have you with us, a governor, agent or there