RESERVE Bank of New Zealand chief economist Paul Conway said on Wednesday that good progress is being made in bringing inflation back to target but a period of restrictive policy was needed to give confidence it would meet the goal.
Conway said in a speech that was live-streamed that increasing spare capacity in the economy including easing in the labour market is likely to further reduce inflation pressure going forward.
“Lower inflation expectations and a lower propensity for firms to make relatively large price increases will help lower inflation persistence,” he said.
Conway added, however, that the processes could occur more quickly or slowly than projected.
The RBNZ has undertaken its most aggressive policy-tightening since 1999, when the official cash rate was introduced, lifting it by 525 basis points since October 2021 to 5.50 per cent.
In May, it signaled a possibility it could go higher if it decides inflation and inflation expectations are not heading towards its target band of 1 per cent to 3 per cent.
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New Zealand inflation was at 4.0 per cent in the first quarter of 2024. Conway said the central bank expects inflation to return to its target band by the end of 2024.
“We face some remaining challenges and uncertainties in bringing inflation sustainably back to target,” he said.
Conway added that the central bank expected to see spare capacity start emerging in the economy over 2024 after several years of the economy growing well beyond its sustainable rate.
“We expect this spare capacity to feed through strongly into lower domestically generated inflation,” he said.
New Zealand economic growth data for the first quarter is due out on Thursday and a Reuters poll of 13 economists sees annual growth of just 0.2 per cent. REUTERS
