New Zealand’s strong economic position may mean the Reserve Bank will normalise interest rates next year, Reserve Bank Governor Adrian Orr has said.
Aotearoa is in a good position economically, Orr told Breakfast today — one day after the Reserve Bank announced it would keep the Official Cash Rate (OCR) at the "extremely" low 0.25 per cent.
"New Zealand has been in a much better place than many countries," he said. "Our health has been in a much steadier place, the economy has rebounded to pretty well near the level it was at pre-Covid and we've had inflation a bit above what the rest of the world has so we're in a good position."
The OCR was dropped to the current rate in March 2020 but positive projections means the Reserve Bank could increase interest rates next year, Orr said.
“It may mean that this time next year we’re thinking about, I would say, normalising interest rates — taking them away from this extremely stimulatory level back to something more neutral that would expect to see in less challenging times,” Orr said.
"I’m very comfortable where we are. Inflation remains slightly below our midpoint, our target. There is still unemployment on aggregate in the economy. Yes, there are skill shortages in some areas. Meanwhile, there is enormous slack in other areas. This is the challenge of the flexibility of the labour market.”
Orr said the Reserve Bank wants to see unemployment dip from 4.7 per cent to “near to four per cent” while inflation of 1.5 per cent “needs to be north”.
“Because at the moment both inflation and the employment level are below the midpoints of the target and so a stimulatory monetary condition pushes both of them in the right direction,” he said.
“In situations where inflation is well above and employment is well below, which one has priority, that’s not our challenge at the moment.”
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