Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Well The RBNZAID governor says a broad decline in CPI
Speaker 2: inflation is not happening across all sectors of the economy.
Speaker 2: The RBN said as I said yesterday, signaling that policy
Speaker 2: will stay tight for longer after keeping rays unchained for
Speaker 2: a seventh straight meeting. Johnny is now from Wellington is
Speaker 2: the LBNSAID Governor Arisunaal Governor.
Speaker 1: Or.
Speaker 2: It's always a pleasure to have you with us, and
Speaker 2: I know you'd been doing a lot of talking over
Speaker 2: the past twenty four hours or so, and I'm going
Speaker 2: to ask you for a bit more insight into that decision.
Speaker 2: And again, much like the last time we spoke, the
Speaker 2: possibility of further tightening was again flagged, particularly when it
Speaker 2: comes to you know, some of these elements that you've
Speaker 2: said domestically have been perhaps more resistant to monetary policy.
Speaker 2: I guess the question would be, would another rate hike
Speaker 2: be meaningful when it comes to getting those aspects of
Speaker 2: inflation lower.
Speaker 3: Another rate hike would only be meaningful if we sought
Speaker 3: inflation expectations we're getting away on us again starting to
Speaker 3: rise because of the persistence of actual inflation. We know
Speaker 3: that forward looking inflation is heavily influenced by the current
Speaker 3: level of inflation, So that's our main concern. You know,
Speaker 3: persistence raises the risks that expectations don't do the job
Speaker 3: that's needed. We know and we are confident that we
Speaker 3: will get inflation down to the one to three percent band.
Speaker 3: We're just like to make sure we get there soon
Speaker 3: without risking that another blowout and expectations.
Speaker 2: You talked about the risk appetite as a committee and
Speaker 2: that the asymmetry is the ability to withstand the risk
Speaker 2: of high inflation.
Speaker 4: Right.
Speaker 2: Do you see that increase risk with some of these
Speaker 2: elements that are leading through to kind of more difficult
Speaker 2: to shake inflation expectations.
Speaker 1: Yeah, we're actually quite pleased.
Speaker 3: We spend a lot of time in the document we
Speaker 3: produced yesterday really getting down to the nuts and bolts
Speaker 3: or the advice of what is left in that consumer
Speaker 3: price index, the bits that are persistent. We've seen a
Speaker 3: lot of success in getting the cost of housing construction down,
Speaker 3: a lot of other services prices down, goods prices.
Speaker 1: You know, the easier to move. The bits that are
Speaker 1: left are insurance.
Speaker 3: They've all got their own idiosyncratic story insurance premiums because
Speaker 3: of what's been happening globally around the extreme climate. We've
Speaker 3: got central and local government rates rises that are always lagged,
Speaker 3: and there's some indexation left in the economy which is
Speaker 3: keying off historical inflation. So you know, we're not surprised
Speaker 3: that getting from four to three to two is much
Speaker 3: harder than getting from seven and a half to four.
Speaker 3: We are showing patients, but you know, we have to
Speaker 3: remain highly aware to any further upward price fikes in
Speaker 3: what that may meanful price setting behavior.
Speaker 5: We've been trying to emphasizement, no continue, We've just been
Speaker 5: trying to emphasize that if price setters pull their heads
Speaker 5: in and except that we're going to be in a
Speaker 5: low inflation environment, wage expectations and actual wages have come
Speaker 5: down considerably, So you know, we're just working through this
Speaker 5: last part of the puzzle. No difference to effectively what
Speaker 5: you're seeing globally. Tradable goods prices fell very quickly, and
Speaker 5: then this home grond.
Speaker 1: Domestic stuff is always more sticky.
Speaker 2: And I get that that sort of non tradeables element
Speaker 2: is going to be crucial here as well, but you
Speaker 2: said that you have limited tolerance for inflationary surprises. To
Speaker 2: the upside is that patients kind of almost running out.
Speaker 2: Do you look at that second quarter CPI print as
Speaker 2: the one that maybe makes or breaks that decision to
Speaker 2: go again or not.
Speaker 3: No, we're not hinged off anyone statistic, and no, patience
Speaker 3: hasn't run out.
Speaker 1: What we are showing is that we've got a lot
Speaker 1: of patients.
Speaker 3: You know, were projection is to keep the official cash
Speaker 3: rate at five point five percent until early next year.
Speaker 3: That we believe that will have inflation back down within
Speaker 3: the band, and at that point we can start thinking
Speaker 3: about normalizing interest rates.
Speaker 1: That's all in our projection.
Speaker 3: The sticky prices that I've talked about in particularly of
Speaker 3: the next couple of quarters have been well signaled and
Speaker 3: they are in our inflation projections.
Speaker 1: So it'd have to be something over and above that
Speaker 1: again to really, you know, to surprise us.
Speaker 3: And we think the risks are balanced over the period
Speaker 3: head that matters for us.
Speaker 1: This time next year, you know, without doubt, the.
Speaker 3: Economy is performing below its potential, an output gap is
Speaker 3: opening up.
Speaker 1: Disinflation is occurring.
Speaker 3: So you know, we feel pretty comfortable. But when you're
Speaker 3: starting from a higher inflation position when you've got low productivity,
Speaker 3: to central bank has to remain alert.
Speaker 4: Do you think though that, given you are seeing those
Speaker 4: calling trends coming in and you're really getting that weaker
Speaker 4: or softer economic data now, even though you have that
Speaker 4: component where where non tradable inflation data is still elevated,
Speaker 4: do you think that there's that need to get inflation
Speaker 4: back to that target band first before cutting, given there
Speaker 4: is that lag transmission effect as well.
Speaker 3: That's exactly correct, and in fact, our projections have US
Speaker 3: easing interest rates before inflation is back at that midpoint, because.
Speaker 1: You are right.
Speaker 3: You know, we have economic growth picking up here in
Speaker 3: New Zealand and our projections from this quarter onward, but
Speaker 3: the level of economic activity is still below the potential,
Speaker 3: so you know we can start to ease before for
Speaker 3: CPI inflation exactly, it's the midpoint of that target and
Speaker 3: that's what our projection has.
Speaker 1: We're at two point nine.
Speaker 3: I think our projections have us around two point nine
Speaker 3: percent the fourth quarter this year. You know, that's a
Speaker 3: toss of the coin whether it's in or out of
Speaker 3: the one to three band, and it's not soon after
Speaker 3: that that we signal.
Speaker 1: Lower interest rates beyond that, So.
Speaker 3: What did we do to surprise the market that it's
Speaker 3: not happening next week? And we've been saying that for
Speaker 3: some time.
Speaker 4: You definitely do seem to have court a few investors
Speaker 4: on the hop over the past few months. But Governor
Speaker 4: you said that you expect growth to pick up. Where
Speaker 4: do you think that growth is coming from? And why
Speaker 4: do you think the New Zealand economy is able to
Speaker 4: cope with such a sustained period of elevated raids.
Speaker 3: The growth is coming through from government spending, government investment.
Speaker 3: We are looking at private investment starting to come back,
Speaker 3: building consensus, et cetera of leveled out. And importantly, you
Speaker 3: know we've had a two percent perannum growth in our
Speaker 3: working age population, so migration has been considerable. The really
Speaker 3: tough stuff is that aggregate demand has been rising per
Speaker 3: capita spend has been falling, and the difference is the
Speaker 3: population has been grown and so that has been putting
Speaker 3: the upward pressure on rents, on demand for dwellings, and
Speaker 3: that's picking construction activity back in the pipeline of infrastructure
Speaker 3: investment is in front of New Zealand is long and
Speaker 3: of course, the world has opened up again, so our
Speaker 3: tourism is finding its feet and likewise, with global growth
Speaker 3: expected to pick up, our trade is also growing. So
Speaker 3: there's lots and lots of economic growth, but there is
Speaker 3: that rebalancing from consumption to production.
Speaker 2: Governor some of the elements that you just talked about, dwellings,
Speaker 2: the supplies out of dwellings, rental cost rising. If there
Speaker 2: is a sharper than expected decline in immigration, would that
Speaker 2: meaningfully change your outlook when it comes to growth and
Speaker 2: does that more impact you know when it comes to
Speaker 2: the labor market side or when it comes to the
Speaker 2: inflationary demand side.
Speaker 1: Do you think yes? So you know the real challenges.
Speaker 1: You can't just change one thing and leave everything else unchanged.
Speaker 3: You know the type of scenario there with migration slowed
Speaker 3: much quaker, they're ager to get demand slows quaker in
Speaker 3: then we wouldn't be as exercised about the level of
Speaker 3: interest rates. So you know, when the facts change, your
Speaker 3: opinion has to change on the way through. But likewise,
Speaker 3: you know, we continue to have a dwelling shortage.
Speaker 1: In New Zealand. It's not unique.
Speaker 3: It's in these countries that have experienced rapidly high immigration,
Speaker 3: and we need to keep building dwellings, public state housing,
Speaker 3: public dwellings, private housing, so on and so forth. Housing
Speaker 3: construction costs have come right off. We've been successful at
Speaker 3: achieving that, but rental costs are high because there is
Speaker 3: still more demand than there is supply for people who
Speaker 3: don't own their own home but.
Speaker 1: Want to rent.
Speaker 2: Governor or very quickly before we let you go, you
Speaker 2: talked about fiscal spending as being one of the upside
Speaker 2: pressures ahead of the budget. Do you expect that tangent
Speaker 2: to continue to play out because we've seen across other
Speaker 2: economies where the fiscal side has inadvertently or not really
Speaker 2: undermined the effect of monetary policy.
Speaker 3: Yes, you know, it's a global and forever challenge. The
Speaker 3: synchronized monetary and fiscal policy is extremely difficult. We've been
Speaker 3: fortunate here in New Zealand. Over the last couple of years.
Speaker 3: The government spending as a proportion of potential output has
Speaker 3: been declining, and that means it has been disinflationary. It
Speaker 3: has been helping the Reserve bank, it has been disinflating
Speaker 3: on the way through. That is still the expectation from
Speaker 3: the official projections to date.
Speaker 1: Of course we'll wait to see what.
Speaker 3: The budget has but you know, in the absence of
Speaker 3: that fiscal discipline, then yes, monetary policy would have more
Speaker 3: work to do.
Speaker 1: And so you know, we're going to.
Speaker 3: Have to see what, if any additional government spending restraint
Speaker 3: will be and the impact of tax changes.
Speaker 2: Really great to have you with us, a governor, agent
Speaker 2: or there