New Zealand's central bank would consider risks to be pointed out more in favor of monetary tightening had market interest rates not risen already, its chief economist said.
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If we were sitting here and still seeing very low interest rates, then you might say the risks are actually more on the upside, Yuong Ha said in an interview Tuesday in Wellington. Market pricing has moved a long way in a very short time. The Reserve Bank raised its cash rate for the second time in two months to 0.75%, and projected a tightening cycle that will take it to about 2.5% over the next two years. The RBNZ said that the main downside risk was the spread of Covid 19 in New Zealand, and the main downside risk was faster inflation becoming embedded.
Ha said that the downside risks, including the emergence of the Omicron coronavirus variant, were unlikely to change the picture of rising price pressures.
The outlook is that demand might be a bit weaker, it might be a bit stronger depending on how households behave in this new world, he said. It is still a world where inflation pressures are rising, capacity pressures are going to stick around for a while and hence you need to remove monetary stimulator rather than maintain it. Markets had correctly read the data developments and shifted interest rates in a way that is consistent with the RBNZ's projected trajectory for the cash rate, Ha said.
He said that the RBNZ is unlikely to use the NZ $53.5 billion $36.6 billion of government bonds it acquired during its quantitative easing program as a tool to tighten monetary conditions.
The bank is currently deciding how to manage its bond holdings. If it were to sell any it would be required to sell them to the Treasury Department rather than the secondary market, he said.
That is just for market functioning and coordination. He said that you don't want the Reserve Bank and the Treasury trying to sell government bonds into a market. It would be canceled or negated behind the scenes, and Treasury would have to figure out if they would issue bonds that we retired or not. The RBNZ is thinking about its options but whatever it decides, it will try to make it as unexciting as possible, he said.
We wouldn't be going out there deliberately trying to engineer higher rates. It is an option, but no central bank in the world has done that, Ha said. We are comfortable with tightening monetary conditions through the OCR, but we have a lot more comfort in how that works, the calibration, quantum. None of the Wildfires Are Worse, and One Chemical Company is Reaping the Benefits.