The Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr said on Wednesday that they were surprised by GDP data last week indicating the economy shrank, but has no opinion yet on what it means for the interest rate outlook, per Bloomberg.
Key quotes
“The data was surprisingly subdued."
“We are internalizing that complex situation and will be back in February with our monetary policy statement.”
“We have been surprised by the continued extremely high level net inward migration,”
“I can’t overemphasize enough that it’s core inflation that’s going to be our challenge ahead,” he said. “So much of that stuff is sitting within central and local government from rates, tax, whatever. The last five yards on the inflation battle is going to be tough.”
"There's still a long way to go, particularly with the level of core inflation, or homegrown inflation, remaining too high,”
Market reaction
NZD/USD extends its rally following Orr’s comments. The pair is currently trading at 0.6271, up 0.08% on the day.
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.
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