NZ: Inflation to remain well contained - Westpac

Satish Ranchhod, senior economist at Westpac, expects inflation to remain well contained within the RBNZ’s 1–3% target band over the next few years, albeit at rates that are a little above 2%.

Key Quotes

“We certainly do not think inflation will rise to levels that would spook the RBNZ into hiking rates any time soon. In fact, the RBNZ’s recent communications have highlighted that, since the adoption of its new dual mandate, it is now more willing to tolerate some rise in inflation above the target mid–point in order to shore up growth. That dovish lurch was evident in the RBNZ’s recent policy statement, which showed higher growth and inflation settling a little above 2% but assumed absolutely no change in the accompanying interest rate projection. With this in mind, we are now forecasting later and more gradual OCR hikes than previously assumed.”

“With inflation currently well contained, there is scope for the Bank to take this ‘growth friendly’ approach over the next few years. But over time, we could see inflation expectations creep higher. That would then mean the Reserve Bank has to maintain higher nominal interest rates to achieve the same real interest rate and keep inflation steady.”