WEBVTT - RBNZ Governor Adrian Orr Talks Inflation, Rates

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Well The RBNZAID governor says a broad decline in CPI

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<v Speaker 2>inflation is not happening across all sectors of the economy.

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<v Speaker 2>The RBN said as I said yesterday, signaling that policy

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<v Speaker 2>will stay tight for longer after keeping rays unchained for

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<v Speaker 2>a seventh straight meeting. Johnny is now from Wellington is

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<v Speaker 2>the LBNSAID Governor Arisunaal Governor.

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<v Speaker 1>Or.

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<v Speaker 2>It's always a pleasure to have you with us, and

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<v Speaker 2>I know you'd been doing a lot of talking over

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<v Speaker 2>the past twenty four hours or so, and I'm going

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<v Speaker 2>to ask you for a bit more insight into that decision.

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<v Speaker 2>And again, much like the last time we spoke, the

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<v Speaker 2>possibility of further tightening was again flagged, particularly when it

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<v Speaker 2>comes to you know, some of these elements that you've

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<v Speaker 2>said domestically have been perhaps more resistant to monetary policy.

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<v Speaker 2>I guess the question would be, would another rate hike

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<v Speaker 2>be meaningful when it comes to getting those aspects of

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<v Speaker 2>inflation lower.

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<v Speaker 3>Another rate hike would only be meaningful if we sought

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<v Speaker 3>inflation expectations we're getting away on us again starting to

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<v Speaker 3>rise because of the persistence of actual inflation. We know

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<v Speaker 3>that forward looking inflation is heavily influenced by the current

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<v Speaker 3>level of inflation, So that's our main concern. You know,

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<v Speaker 3>persistence raises the risks that expectations don't do the job

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<v Speaker 3>that's needed. We know and we are confident that we

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<v Speaker 3>will get inflation down to the one to three percent band.

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<v Speaker 3>We're just like to make sure we get there soon

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<v Speaker 3>without risking that another blowout and expectations.

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<v Speaker 2>You talked about the risk appetite as a committee and

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<v Speaker 2>that the asymmetry is the ability to withstand the risk

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<v Speaker 2>of high inflation.

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<v Speaker 4>Right.

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<v Speaker 2>Do you see that increase risk with some of these

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<v Speaker 2>elements that are leading through to kind of more difficult

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<v Speaker 2>to shake inflation expectations.

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<v Speaker 1>Yeah, we're actually quite pleased.

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<v Speaker 3>We spend a lot of time in the document we

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<v Speaker 3>produced yesterday really getting down to the nuts and bolts

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<v Speaker 3>or the advice of what is left in that consumer

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<v Speaker 3>price index, the bits that are persistent. We've seen a

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<v Speaker 3>lot of success in getting the cost of housing construction down,

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<v Speaker 3>a lot of other services prices down, goods prices.

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<v Speaker 1>You know, the easier to move. The bits that are

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<v Speaker 1>left are insurance.

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<v Speaker 3>They've all got their own idiosyncratic story insurance premiums because

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<v Speaker 3>of what's been happening globally around the extreme climate. We've

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<v Speaker 3>got central and local government rates rises that are always lagged,

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<v Speaker 3>and there's some indexation left in the economy which is

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<v Speaker 3>keying off historical inflation. So you know, we're not surprised

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<v Speaker 3>that getting from four to three to two is much

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<v Speaker 3>harder than getting from seven and a half to four.

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<v Speaker 3>We are showing patients, but you know, we have to

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<v Speaker 3>remain highly aware to any further upward price fikes in

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<v Speaker 3>what that may meanful price setting behavior.

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<v Speaker 5>We've been trying to emphasizement, no continue, We've just been

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<v Speaker 5>trying to emphasize that if price setters pull their heads

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<v Speaker 5>in and except that we're going to be in a

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<v Speaker 5>low inflation environment, wage expectations and actual wages have come

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<v Speaker 5>down considerably, So you know, we're just working through this

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<v Speaker 5>last part of the puzzle. No difference to effectively what

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<v Speaker 5>you're seeing globally. Tradable goods prices fell very quickly, and

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<v Speaker 5>then this home grond.

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<v Speaker 1>Domestic stuff is always more sticky.

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<v Speaker 2>And I get that that sort of non tradeables element

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<v Speaker 2>is going to be crucial here as well, but you

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<v Speaker 2>said that you have limited tolerance for inflationary surprises. To

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<v Speaker 2>the upside is that patients kind of almost running out.

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<v Speaker 2>Do you look at that second quarter CPI print as

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<v Speaker 2>the one that maybe makes or breaks that decision to

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<v Speaker 2>go again or not.

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<v Speaker 3>No, we're not hinged off anyone statistic, and no, patience

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<v Speaker 3>hasn't run out.

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<v Speaker 1>What we are showing is that we've got a lot

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<v Speaker 1>of patients.

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<v Speaker 3>You know, were projection is to keep the official cash

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<v Speaker 3>rate at five point five percent until early next year.

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<v Speaker 3>That we believe that will have inflation back down within

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<v Speaker 3>the band, and at that point we can start thinking

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<v Speaker 3>about normalizing interest rates.

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<v Speaker 1>That's all in our projection.

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<v Speaker 3>The sticky prices that I've talked about in particularly of

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<v Speaker 3>the next couple of quarters have been well signaled and

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<v Speaker 3>they are in our inflation projections.

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<v Speaker 1>So it'd have to be something over and above that

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<v Speaker 1>again to really, you know, to surprise us.

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<v Speaker 3>And we think the risks are balanced over the period

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<v Speaker 3>head that matters for us.

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<v Speaker 1>This time next year, you know, without doubt, the.

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<v Speaker 3>Economy is performing below its potential, an output gap is

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<v Speaker 3>opening up.

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<v Speaker 1>Disinflation is occurring.

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<v Speaker 3>So you know, we feel pretty comfortable. But when you're

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<v Speaker 3>starting from a higher inflation position when you've got low productivity,

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<v Speaker 3>to central bank has to remain alert.

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<v Speaker 4>Do you think though that, given you are seeing those

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<v Speaker 4>calling trends coming in and you're really getting that weaker

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<v Speaker 4>or softer economic data now, even though you have that

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<v Speaker 4>component where where non tradable inflation data is still elevated,

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<v Speaker 4>do you think that there's that need to get inflation

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<v Speaker 4>back to that target band first before cutting, given there

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<v Speaker 4>is that lag transmission effect as well.

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<v Speaker 3>That's exactly correct, and in fact, our projections have US

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<v Speaker 3>easing interest rates before inflation is back at that midpoint, because.

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<v Speaker 1>You are right.

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<v Speaker 3>You know, we have economic growth picking up here in

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<v Speaker 3>New Zealand and our projections from this quarter onward, but

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<v Speaker 3>the level of economic activity is still below the potential,

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<v Speaker 3>so you know we can start to ease before for

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<v Speaker 3>CPI inflation exactly, it's the midpoint of that target and

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<v Speaker 3>that's what our projection has.

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<v Speaker 1>We're at two point nine.

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<v Speaker 3>I think our projections have us around two point nine

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<v Speaker 3>percent the fourth quarter this year. You know, that's a

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<v Speaker 3>toss of the coin whether it's in or out of

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<v Speaker 3>the one to three band, and it's not soon after

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<v Speaker 3>that that we signal.

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<v Speaker 1>Lower interest rates beyond that, So.

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<v Speaker 3>What did we do to surprise the market that it's

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<v Speaker 3>not happening next week? And we've been saying that for

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<v Speaker 3>some time.

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<v Speaker 4>You definitely do seem to have court a few investors

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<v Speaker 4>on the hop over the past few months. But Governor

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<v Speaker 4>you said that you expect growth to pick up. Where

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<v Speaker 4>do you think that growth is coming from? And why

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<v Speaker 4>do you think the New Zealand economy is able to

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<v Speaker 4>cope with such a sustained period of elevated raids.

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<v Speaker 3>The growth is coming through from government spending, government investment.

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<v Speaker 3>We are looking at private investment starting to come back,

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<v Speaker 3>building consensus, et cetera of leveled out. And importantly, you

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<v Speaker 3>know we've had a two percent perannum growth in our

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<v Speaker 3>working age population, so migration has been considerable. The really

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<v Speaker 3>tough stuff is that aggregate demand has been rising per

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<v Speaker 3>capita spend has been falling, and the difference is the

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<v Speaker 3>population has been grown and so that has been putting

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<v Speaker 3>the upward pressure on rents, on demand for dwellings, and

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<v Speaker 3>that's picking construction activity back in the pipeline of infrastructure

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<v Speaker 3>investment is in front of New Zealand is long and

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<v Speaker 3>of course, the world has opened up again, so our

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<v Speaker 3>tourism is finding its feet and likewise, with global growth

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<v Speaker 3>expected to pick up, our trade is also growing. So

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<v Speaker 3>there's lots and lots of economic growth, but there is

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<v Speaker 3>that rebalancing from consumption to production.

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<v Speaker 2>Governor some of the elements that you just talked about, dwellings,

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<v Speaker 2>the supplies out of dwellings, rental cost rising. If there

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<v Speaker 2>is a sharper than expected decline in immigration, would that

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<v Speaker 2>meaningfully change your outlook when it comes to growth and

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<v Speaker 2>does that more impact you know when it comes to

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<v Speaker 2>the labor market side or when it comes to the

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<v Speaker 2>inflationary demand side.

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<v Speaker 1>Do you think yes? So you know the real challenges.

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<v Speaker 1>You can't just change one thing and leave everything else unchanged.

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<v Speaker 3>You know the type of scenario there with migration slowed

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<v Speaker 3>much quaker, they're ager to get demand slows quaker in

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<v Speaker 3>then we wouldn't be as exercised about the level of

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<v Speaker 3>interest rates. So you know, when the facts change, your

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<v Speaker 3>opinion has to change on the way through. But likewise,

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<v Speaker 3>you know, we continue to have a dwelling shortage.

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<v Speaker 1>In New Zealand. It's not unique.

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<v Speaker 3>It's in these countries that have experienced rapidly high immigration,

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<v Speaker 3>and we need to keep building dwellings, public state housing,

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<v Speaker 3>public dwellings, private housing, so on and so forth. Housing

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<v Speaker 3>construction costs have come right off. We've been successful at

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<v Speaker 3>achieving that, but rental costs are high because there is

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<v Speaker 3>still more demand than there is supply for people who

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<v Speaker 3>don't own their own home but.

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<v Speaker 1>Want to rent.

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<v Speaker 2>Governor or very quickly before we let you go, you

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<v Speaker 2>talked about fiscal spending as being one of the upside

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<v Speaker 2>pressures ahead of the budget. Do you expect that tangent

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<v Speaker 2>to continue to play out because we've seen across other

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<v Speaker 2>economies where the fiscal side has inadvertently or not really

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<v Speaker 2>undermined the effect of monetary policy.

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<v Speaker 3>Yes, you know, it's a global and forever challenge. The

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<v Speaker 3>synchronized monetary and fiscal policy is extremely difficult. We've been

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<v Speaker 3>fortunate here in New Zealand. Over the last couple of years.

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<v Speaker 3>The government spending as a proportion of potential output has

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<v Speaker 3>been declining, and that means it has been disinflationary. It

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<v Speaker 3>has been helping the Reserve bank, it has been disinflating

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<v Speaker 3>on the way through. That is still the expectation from

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<v Speaker 3>the official projections to date.

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<v Speaker 1>Of course we'll wait to see what.

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<v Speaker 3>The budget has but you know, in the absence of

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<v Speaker 3>that fiscal discipline, then yes, monetary policy would have more

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<v Speaker 3>work to do.

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<v Speaker 1>And so you know, we're going to.

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<v Speaker 3>Have to see what, if any additional government spending restraint

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<v Speaker 3>will be and the impact of tax changes.

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<v Speaker 2>Really great to have you with us, a governor, agent

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<v Speaker 2>or there