Keeping inflation expectations well-anchored is high on the RBNZ’s list of priorities to ensure the economy does recover more quickly, he said.
But the labour shortages and supply chain issues that are top of regulators and policy makers agendas around the world are impacting the New Zealand economy.
“What we are really focused on at the moment is inflation expectations because they are absolutely critical to us. They are a key part of our mandate. They are a key part of our credibility,” he said.
“We need to have the confidence that inflation is going to remain low and stable in the future. That really helps us deliver on that mandate.
“We know if we don’t keep inflation expectations well-anchored, we are going to have to lift interest rates a lot more in the future.
“That will cause more pain later if we don’t do a job sooner.”
Regarding the housing market, he said: “It’s something we have talked about a lot. From a monetary policy point of view we have a commitment to assess the impact of our actions on house prices.”
Noting that house price affordability was still “stretched” and that the market needed to cool, he added that ‘house prices are still 5% to 20% away from sustainable levels’.
“Our current approach is that we think we need to act briskly to keep inflation low,” he said.
“We need to take action now to keep inflation expectations well-anchored and to reduce the need for us to increase interest rates even further down the track to get on top of things.
“Our projections are that – they have fallen by 5% so far – and for them to fall another 10% over the course of the next two years as part of that adjustment back to something that is more sustainable.”
On Demand: The Economic and Financial Outlook; Christian Hawkesby, Deputy Governor RBNZ
Picking up an audience question on the housing market in 2008, he said: “With the parallels with the GFC, I think the starting point is important.
“One of the key differences we have relative to the GFC is that starting point - the quality of banks’ balance sheets and the starting point of the economy, particularly the resilience of the labour market means we have got that buffer there.”
But, he admitted: “Our projections do set out a period of subdued consumption growth ahead of us. That’s because we’re moderating demand and engineering interest rates to ensure that happening.
“That does mean we are in a period of lower growth.”
Mr Hawkesby was speaking as the RBNZ commenced its review of its monetary policy Remit that guides its decision making goal in pursuit of low and stable inflation and maximum sustainable employment.
RBNZ Chief Economist Paul Conway said: “Do people think the inflation target is about right? How should we go about supporting maximum sustainable employment? How relevant are major economic trends under public discussion, such as house price sustainability, distributional outcomes, or climate change? We hope to see a wide range of views,” he says.
