RBNZ head says that aggressive tightening cycle is nearing its completion

New Zealand may be coming to the end of its aggressive tightening cycle, as Reserve Bank Governor Adrian Orr sees new signs of the beginning of a consumption slowdown.

The Governor of the Reserve Bank was at the annual meeting of central banks in Jackson Hole. In an interview with Bloomberg Television, Orr said, "We know we have to slow down the economy. We knew we needed to be 3% higher to start this slow travel, and now we're in a much more comfortable position."

The head of the RBNZ commented, "We think there will be at least a couple more rate increases, but then we hope to be in a position where we can lean on the data." This triggered a decrease of the kiwi dollar.

The RBNZ raised the official monetary rate to 3% last week. Also, there was a prediction of raising the benchmark rate to at least 4% to fight against the fastest inflation in more than 30 years.

The central bank has raised rates by 2.75 percentage points over the past 10 months. This represented its fastest tightening tempo since the pioneering targeting of inflation was implemented more than 30 years ago. This value exceeds the figures of the Federal Reserve and the Bank of Canada.

According to predictions by many economists, the end of New Zealand's tightening cycle is expected in early 2023, when the OCR will be 4%. However, some of them say that there is room only for one more half-percent increase before the tempo slows down.

Ben Jarman, senior economist at J. P. Morgan gave his view, "The annual inflation rate is likely to fall significantly in the next session, which will force the RBNZ to pay more attention to the activity data and complete the upward cycle over the next few meetings".

On Thursday, after New Zealand reported an unexpected decrease in retail sales in the second quarter, the focus on activity became more evident. This increased the risk of consecutive quarters of economic declines and a local recession determination.

Nevertheless, the governor has made it clear that the RBNZ wants to reduce consumption.

"Our prediction is almost unchanged real consumption, so it's not surprising to us that retail sales will increase in this way," Orr said. "That's a good sign that this monetary policy bites, and we're doing our job."

"Consumers will bear much of the recession's weight because we have an open trade economy. Our monetary policy basically bites on domestic spending."

According to Orr, slowing growth is a necessary position. He believes that growth does not have to be negative.

The head of the RBNZ assured in observing the evidence of the easing of price pressures made by politicians. This month's report showed that expectations for the inflation rate for two years ahead fell for the first time since 2020.

Consumer price inflation reached a peak of 7.3% in the second quarter of this year. The RBNZ predicts consumer price inflation to fall to 3.8% by the end of 2023.

Central banks around the world are raising rates fast in an attempt to reduce demand and compensate for price pressures. But it also increases the risk of going to extremes and sinking their economy into recession. 

"These strong pressures will cause most countries around the world to be very close to zero economic growth, or surely below potential economic growth, or they would not be able to do their jobs," Orr said. "It is quite possible that some countries will show two negative quarters of growth."