New Zealand's central bank hopes inflation has peaked

According to Chief Economist Paul Conway, the Reserve Bank of New Zealand (RBNZ) expects inflation to have already peaked, even though third-quarter reports showed it was higher than anyone would have expected.

Conway said the 7.2% inflation rate was "clearly too high", but the bank still expects inflationary pressures to ease in the future and hopes that inflation has peaked. The chief economist also added that the sharp tightening of monetary policy is already paying off. There are early signs that tensions in the economy are starting to subside.

The RBNZ projected a slowdown in inflation from 7.3% to 6.4%. Most economists and investors now expect the central bank to accelerate tightening, raising the rate by 75 points next month, bringing the official interest rate to 4.25%.

Among other things, Paul Conway singled out falling home prices as a sign of weakened demand, saying that they have collectively fallen about 10 percent from their peak last year, and some major cities have seen even larger declines in recent months.

«It's as if we're seeing a reverse wealth effect, which should slow consumption», he said. There are plenty of signs pointing to an impending downturn, or at least a significant slowdown in construction activity.

Conway spoke of the significant challenges facing the global economy, «From chaos in financial markets to central banks running out of ammunition and government spending spiraling out of control».

At the same time, the chief economist said that the RBNZ had underestimated the power of import price pressures, and the era in which globalization suppressed inflation may be coming to an end.

Numerous statements and academic articles are emerging that point to a steady increase in international inflationary pressures. Paul Conway suggests that recent inflation rates are not as extreme as what they may have observed over the past year. In any case, however, the era of low inflation is probably coming to an end.

Conway said that favorable demographics in some countries and, in particular, the activities of China, a workshop for the world, have contributed to low inflation in recent decades, although much is now changing. The economist explained that this is primarily due to the pandemic and thus the accompanying supply disruptions, but globalization is also changing, demographics are changing, and China is no longer the deflationary force it once was.