RBNZ's Conway: Interest rates moving toward neutral

Lallalit Srijandorn FXStreet

Reserve Bank of New Zealand Chief Economist Paul Conway said late Tuesday that the interest rate will tend towards neutral in the absence of future shocks to the system as pandemic-related disruptions fade, per Reuters.

Key quotes

Given uncertainty, we will need to 'feel our way' as the (official cash rate) gets closer to our estimate of neutral.

At 4.25%, the OCR is currently still restrictive, against Reserve Bank estimates of the long-term nominal neutral interest rate being between 2.5% and 3.5%.

With declining inward migration and weak productivity growth, potential output growth is likely to be modest.

The Monetary Policy Committee is confident that remaining persistent domestic inflation pressures will abate.

Easing domestic pricing intentions and a drop in inflation expectations will help open the way for some further easing of the OCR, as signalled in November.

Market reaction

At the time of writing, the NZD/USD pair is trading 0.08% lower on the day to trade at 0.5665.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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