Paul Conway, the Reserve Bank’s new chief economist, said in an interview Monday in Wellington. “The labor market is strong and that’s the underlying reason why the New Zealand economy is well placed to weather the storm.”
It’s difficult to engineer a soft landing — typically a significant reduction in inflation is accompanied by negative economic growth — but there’s reasons to believe New Zealand is well placed to pull it off this time around.
Conway said the Monetary Policy Committee didn’t seriously consider a bigger move of 75 basis points. The RBNZ last week raised its Official Cash Rate by half a percentage point for a second consecutive meeting and forecast a steeper tightening track that will take the OCR to around 4% next year from 2% today.
While the RBNZ expects economic growth to slow, it doesn’t predict any quarters of contraction. Conway said that’s largely due to the resilience of the labor market.
In many ways the labor market has been the mainstay of the New Zealand economy over the last few years and it’s probably one of the reasons why demand has stayed so strong. At the same time, churn has increased as people move out of industries affected by the pandemic and into growth areas.
Conway said. “The thing about people moving jobs is they often get a pay rise in the process.”
The labor market is extremely tight and “showing no signs of loosening,” he said, which is “feeding into inflation expectations.”
It’s a “worry” that measures of medium-term inflation expectations have increased so much, while gauges of core inflation are also now outside the RBNZ’s 1-3% target band.
“The Monetary Policy Committee is very cognizant of those risks associated with inflation expectations getting well out of the band and measures of core inflation getting outside of the band, so it really is time to lean in against those.”
To be sure, he noted the high degree of uncertainty in the global economy and said a slowdown in China could have implications for New Zealand’s growth.
He won’t officially join the MPC until later this year, but he sat in on its deliberations ahead of last week’s decision as an observer.
Conway said it’s important that businesses and workers keep price and wage increases in check to avoid the central bank having to do even more with interest rates to contain inflation.
