New Zealand central bank says economy slowing, still not sure if rates high enough

© Reuters. FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray/File Photo

By Lucy Craymer and Wayne Cole

WELLINGTON (Reuters) -A top New Zealand central banker on Thursday said interest rates were clearly in contractionary territory and causing a welcome slowdown in demand in the economy, though it was not yet clear that inflation expectations were under control.

Reserve Bank of New Zealand (RBNZ) Chief Economist Paul Conway said the 450-basis-point rise in the official cash rate (OCR) over the past 18 months was still “percolating” through the economy and would likely further weigh on consumer spending.

At 7.2%, inflation in New Zealand is near a three-decade high and well above the central bank’s target bank of 1% to 3%. Also, short term inflation expectations in the first quarter remained just above 5.5%, according to RBNZ data.

“On balance, our measures of neutral interest rates – the interest rate that is neither stimulatory nor contractionary – indicate the OCR is now comfortably above neutral and having the desired contractionary effect,” Conway said.

But he added that if inflation expectations did not fall, the central bank would need to do more work through interest rates to bring those expectations down. It would also need to do more work through “the real side of the economy”, he said, without elaborating on that point.

Conway spoke at the KangaNews-ANZ New Zealand Capital Markets Forum in Wellington.

The central bank has lifted the OCR from 0.25% in October 2021 to 4.75% and signalled it plans further increases. It has said it is trying to engineer a shallow recession to slow demand. Fourth-quarter GDP fell 0.6%.

Conway said there were welcome signs that demand was slowing but, given recent weather events and the ongoing impact of the pandemic, forecasting the economy was very challenging right now.

“We’re starting to see signs of people cooling their jets,” he said. “It’s pretty lumpy; it’s bouncing around.”