By Lucy Craymer and Renju Jose
WELLINGTON (Reuters) -A top New Zealand central banker said on Wednesday the official interest rate will move towards a lower, neutral level in the absence of future shocks to the system, as pandemic-related disruptions abate and inflation subsides.
“Given uncertainty, we will need to ‘feel our way’ as the (official cash rate) gets closer to our estimate of neutral,” Reserve Bank of New Zealand Chief Economist Paul Conway said in a speech.
The current official rate of 4.25% is still restrictive against the bank’s estimates of a long-term neutral rate between 2.5% and 3.5%, Conway said.
The RBNZ has cut the official cash rate by 125 basis points since August as inflation eased but economic activity also contracted, pushing the country into recession in the third quarter. The central bank said in November it expected to cut by a further 50 basis points when it meets next month.
“Easing domestic pricing intentions and the recent drop in inflation expectations help open the way for some further easing,” Conway said.
Official data released last week showed inflation in the fourth quarter was at an annual rate of 2.2%, comfortably within the central bank’s target range of 1% to 3% for the second consecutive quarter.
The central bank’s monetary policy committee is confident domestic inflation pressures will ease through 2025 and that economic growth will pick up over the next two years as rate cuts feed through to activity, Conway said.
“Over the next few years, with declining inward migration and weak productivity growth, potential output growth is likely to be modest,” he added. “This will set a modest ‘speed limit’ on how fast the economy can grow without generating excess inflation pressure.”
(Reporting by Lucy Craymer in Wellington and Renju Jose in Sydney; Editing by Jamie Freed)
