(Bloomberg) -- New Zealand’s central bank will be closely watching inflation expectations to determine whether it needs to raise interest rates at a faster pace, Assistant Governor Christian Hawkesby said.
“Inflation expectations are going to be absolutely key for us,” Hawkesby said in an interview with Bloomberg Television Friday in Wellington. “There are things that could make us go faster, and I think inflation expectations is one.”
The Reserve Bank this week lifted its official cash rate for a second time, to 0.75%, and projected a tightening cycle that will take the benchmark to 2.5% over the next two years. Two-year inflation expectations have jumped to 2.96%, the highest in a decade, while headline inflation is running at 4.9% and forecast to accelerate toward 6% in coming months.
The RBNZ is tasked with keeping inflation around the midpoint of a 1-3% target range over the medium term.
Hawkesby said inflation expectations are doing what the bank expects at the moment.
“Five- to 10-year inflation expectations are very well anchored,” he said. “Short-term inflation expectations have lifted with headline, but lifted in a way that we would anticipate, so I think that’s a really key thing to watch.”
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The risks to the economic outlook are currently balanced, Hawkesby said.
“On the upside, the risks are that we’ve had a very strong economy, a big change in the starting point, inflation expectations, there’s a risk that they lift,” he said.
“But on the other side, interest rates have moved a long way here in New Zealand, mortgage rates are nearly 2% up from their lows in January, and ahead of us we’re going to have to navigate having Covid in our community.”
That’s why the RBNZ is comfortable raising rates in 25 basis-point increments for now, he said.
While rising inflation expectations might prompt more aggressive tightening, there may also be reasons to slow down or pause, “particularly if the tightening in monetary conditions impacts the economy more quickly than we expect,” Hawkesby said.
However, it was clear the RBNZ needed to continue to remove stimulus.
“In New Zealand we’ve had a very resilient economy, we’ve got core inflation running near the top of our 1-3% target range, we’ve got an employment market that’s through what we think it maximum sustainable employment,” he said.
“So we’re getting pretty clear signals that we need to continue this process of removing stimulus and getting interest rates back up towards neutral.”
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