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Dow Jones Newswires: New Zealand’s central bank surprised by strength of inflation

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WELLINGTON, New Zealand — Stronger inflation pressures recently were a surprise for New Zealand’s central bank and the reason it has forecast that the cash rate will reach 4.0% sooner, monetary-policy committee member Adam Richardson said Monday.

“The inflation shock that is going on around the world continues to leak into domestic prices a bit more than we assumed,” Richardson said in an interview with The Wall Street Journal. “What we tend to find is that domestic inflation is a lot more persistent than the imported inflation.”

The Reserve Bank of New Zealand last week raised its cash rate by 50 basis points for a fourth consecutive meeting, bringing it to 3.0%. Its projections indicate that the cash rate could reach 4.0% late this year or early next year. That compares with its May forecast of the second quarter of 2023. If those projections hold, the RBNZ will have raised interest rates by 375 basis points in little more than a year.

The monetary policy committee’s Aug. 17 meeting did canvas all options for the size of its rate increase, but a smaller 25-basis-point move wasn’t give much consideration.

“It’s always in there, but it wasn’t a huge or major part of the discussion or landscape,” Richardson said.

Still, the RBNZ, which says inflation won’t return to its 1.0%-3.0% target range until mid-2024, also is using the “full flexibility” of its medium-term mandate for controlling consumer prices, he said.

Consumer prices rose 7.3% from a year earlier in the second quarter.

Low unemployment has been a reassuring factor for the RBNZ as consumer confidence slumps to recession-like levels in response to rising interest rates, Richardson said.

The central bank also has been encouraged that long-term inflation expectations have remained “relatively well anchored” in the central bank’s target range, even as it expects high inflation to persist for several quarters, he said.

“As any central bank would say, what we’ll be focused on is bringing core [inflation] measures down. You might see a bit of volatility in headline [inflation], but core will be the key focus for us.”

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