Coming all the way from New Zealand to join me for this interview.
Now I want to start by asking you about the last meeting.
You are clearly tilting towards higher rates.
You are definitely signaling there's more to go.
But just how aggressive do you think you might have to be.
Are you willing to go. Because for example your deputy governor
Christine Hoxby just told Bloomberg News that 4 percent maybe for a quarter
percent. It seems like you're saying the door is
open. It's where we've been trying to get back
to a position where we can be more data driven again rather than you know the
rush back to north of neutral. We know we had to slow the economy.
We knew we had to be you know 3 percent plus to even begin that slowing journey.
And so now really we're in a much more comfortable position.
We think there'll be at least another couple of rate hikes.
But then we hope to get into a position where we can be data driven
and get back to our normal position of watching worrying and waiting.
OK. What are you watching.
Waiting. Worrying the most.
We're looking for you know significant signals of inflation expectations and
actual inflation declining. We're seeing the beginning of that quite
strongly side. I do feel confident we're on top of it.
We will have to be cautious. We don't need to be chasing inflation
all the way down just as we've just as we laid it up.
So we're watching for signs where we can be one confident we are slowing the
economy and to confident that that is credible.
And feeding into inflation expectations. You're clearly watching all measures the
economy closely. And the consumer is one the big drivers
of any economy. We saw the retail sales for New Zealand
the yearly rate negative for the second quarter in a row.
And we just saw the first quarter of GDP a little bit negative.
And so people are saying well retail spending is pretty important.
Are we going to see a second negative quarter.
The technical recession is. Do you think that's positive.
Our core view is no that we won't see. A technical recession is quite a
reasonable bounceback in economic activity.
For Q2 of this year we need a very low consumption and
folktale. Our outlook is for almost flat for real
consumption. And so for us to see retail sales come
off like that it's not a surprise. It's a good signal that that monetary
policy is biting that we're doing our work.
But there are many other things that are driving the GDP figure and our terms of
trade remains very strong. Tourism is coming back into the market.
The countries reopened. And you know the investment particularly
in construction activity is still very strong.
So consumers will be taking a significant part of the brunt of the
slowdown because you know we're an open trading
economy. Our monetary policy mostly bites on
domestic spending. A big question for I think all central
bankers facing these big surges is inflation is
are you willing are you willing to push that hard.
You have this little surprise on retail sales.
What if things fall more quickly. What if you are heading into recession.
Is that somehow a necessary evil to get inflation down.
Well certainly slower growth is a necessary position that we have to see.
There doesn't have to be negative growth.
It just means that economic activity grows slower than the potential growth
of the economy. And so that potential growth is a
positive. Right.
And so we can have a positive economic growth.
But declining capacity pressures the single biggest capacity pressure
globally is just the shortage of labour. We can't print people.
If we could if we could make the supply sort of the economy move quicker we'd be
fine. We can't.
So we have to confront the demand down on that though.
What are you willing though. That seems to be the question for
central bankers if you have to push that hard.
Are you willing to do it. I would say that it's pushing that hard.
It's going to take most countries around the world very close to zero economic
growth or certainly below potential economic growth otherwise not doing
their job. Once you're at that level you can see.
But given the uncertainty you know it's likely that some countries will be
printing two negative quarters of growth specifically for New Zealand at this
point. We don't see that.
Can you ever rule out something like that.
Our projections at the moment going ahead have pretty anemic economic growth
because of what we're doing. Go to that point.
There's some criticism that you know by this aggressive rate hike cycle you're
actually incentivizing the sort of investment that perhaps is needed to try
to solve those supply side issues. I mean for supply side issues monetary
policy is a very blunt instrument. As we've all talked about though is that
really a risk there. Are you sort of balancing and looking at
I guess that that the necessary of the evils or the best of the evils that you
have to choose from. I think we are.
I mean the euro is the single biggest problem that can happen for any economy
and certainly one that New Zealand has experienced.
Before is high and variable inflation and a central bank that does not have
credibility to to control it inflation. So you cannot have maximum sustainable
employment without low and stable inflation.
So that's you know that's its primary target number one.
The second part though is that on the supply side investment is very strong.
In fact the construction sector is going through a record period of investment.
I saw one regional local bank in New Zealand talking about a surplus supply
of housing. By this time next year.
So that is how quickly we've gone from a unbelievable deficit through that
construction period to to a surplus. Now the government has a significant
investment portfolio ahead of itself like most obesity countries.
Infrastructure was post-World War 2 there.
It is necessary unglamorous infrastructure investment roading health
education all of the utilities. So that's in fact the government's been
waiting for a quiet period. So they don't crowd out private sector
investment. And also whilst construction of this
will slow the broader export sector has been very strong and the investment
there. Our terms of trade the regional parts of
New Zealand have done very well over the last two years
to that point. Do you worry a little bit more now about
the weakness from China not just sort of that the stabilization measures that
we're seeing but the fact that even after the Congress after this year we're
setting up for a period of structurally normalized lower growth and lower
demand. Yes.
So you know in our projections we see you know the labor markets employment
growth remains positive but we see unemployment rising.
And and so what we're saying is the labor force is coming back and our
borders are reopened. Our net immigration will be positive.
So there'll be a lot of supply side impetus to the economy.
The other part of course is productivity.
And that has been very weak. We need we need the investment.
We need the technology. We need to be doing the same thing
better rule better things operating smarter.
So there's a lot of incentives there for firms to invest.
The last two years living in lockdown I would say the advantages of technology
really have come home. New Zealand Shery Ahn.
It can still sell to the world even without leaving home.
Very well. And a lot of adaptation is happening.
So it's been you know it is a I think we're in a pretty strong position.
We've got employment near maximum above maximum sustainable employment.
The inflation demon we're getting on top of that net immigration is starting to
rise again. You seeing a more balanced environment
ahead. Now the Fed Reserve especially in focus
here in Jackson Hole they have said well they're gonna keep
raising rates. The door is open to 50 or 75.
Does that put. And what does this mean for for the RBA
NZ. What does it mean for the markets.
Bond spread yields spreads exchange rates.
Is it something that puts more pressure on you.
How do you deal with that. I think it's you know fortunately for in
my position we we have a floating currency.
So there is a lot easier when you're dealing with a floating exchange rate.
It will absorb a lot of the differences that's happening between country and
country B. But without doubt the drive back towards
the U.S. dollar the strength of the U.S.
dollar you know has put capital outflows a lot of strains on a lot of our trading
partners. If you're a country with a a managed
exchange rate or a fixed exchange rate the more stronger the U.S.
dollar the higher the interest rates the larger the capital exit from those
countries the more they have to intervene to manage the exchange rate
the more reserves that are being spent to do that work.
So you know the impact is almost to second fold for us.
It's not. Yes.
There's the direct exchange rate effect and higher imported prices.
But for us it's more about what is the impact on major trading partners of New
Zealand China Malaysia Indonesia Hong Kong.
These these you know our region of the world.
And you know when you're lifting interest rates just to maintain your
exchange rate that puts a lot of pressure on foreign reserves.
And the domestic economy is well on us. But indirectly here are the the exchange
rate. Will it impact quite quickly on on CPI
prices immediately. Right.
But we tend to look through that and think about those secondary effects.
You just mentioned the neutral rate and I believe you and your colleagues have
mentioned something like 2 to 3 percent as the annual rate.
Maybe an oversimplified question. How can that be the neutral rate if your
year over year CPI is running at seven point three percent.
It seems like it's still pretty negative on the real side.
Yes. So so what we're talking about is a
neutral rate in equilibrium you know away from business cycles up or down.
What would be the level of the interest rate on average through time.
And if you think about that there's some common.
Of real growth real GDP plus inflation. So a neutral interest rate of around 2
to 3 percent is still low because you're only talking of real growth of 1 to 2
per cent and inflation of 1 to 2 percent.
Some combination of that. So you know we can't say that that's a
particularly aggressive neutral interest rate on average through time.
But you're right. With current CPI and current interest
rates the current interest rate that people are seeing is
higher nominal terms negative in real terms.
This is maybe a bit of a central question but the response to the
pandemic at the start was kind of cited as being a fear of reaching a level of
deflation. Would you say that central bankers feel
more comfortable confronting inflation than the risk of deflation.
And is the risk that we ultimately end up there anyway.
If the policy doesn't play out the way as intended
here. So great question.
You know the central bank has a far much more experience dealing with inflation
fighting from high inflation to low inflation and operating where the
nominal interest rates and the official cash rates are all positive nominal
terms. We know a lot about that.
And that's that's a lost it's it's a challenge.
We know how to manage that challenge. Reducing demand through higher interest
rates and bringing that down the consumer around deflation.
And the governor of the Bank of Japan is with us.
You know they've had many decades on the other side where you're trying to
increase the nominal rate of inflation to something above zero.
And that is an incredibly difficult task.
And that's where monetary policy tools are limited.
And you have to be thinking quite creatively as they have done over
decades in Japan to get a small positive inflation almost a voucher system saying
here's your voucher. If you don't spend it within the year
it's not worth anything anymore. Encouraging people to get out there and
consume and spend. So we always talked about the least you
know what's the least worst risk. There would be slightly higher inflation
at the end of this pandemic period rather than deflation.
And that's where we're at now. You know our core inflation 4 to 6
percent we believe we are largely at the peak of it now and
we will fight it back into a one to three fighting back.
You know you the RBA said was the first you know major central bank to cut rates
when the pandemic started 75 basis points in one month push.
Right. Then you start raising rates.
One of the first ones to do that. One of the first ones to do 50 basis
point hikes. And yet you are getting a lot of
pushback a lot of questioning a lot of criticism.
Well how do you how do you respond to that.
Are our central banks being expected including the RBA and said to do more.
Are people thinking this is sort of an exact science rather than something that
you have to you know try to do it do the steps.
Well how do you what do you think for you and for other central banks after
this pandemic after surging inflation. It's so central banks need to be
transparent. They need to be very open and willing to
to you know show all of their workings to how they get to where they are and
really what they are trying to achieve. I find the hardest thing for a central
bank is to explain to the public what you cannot achieve.
We cannot. As I mentioned before people we
certainly can expand your labour force. We can't make your health system better.
We can't educate your children is. But a lot of the public just see they
say you are government you're part of government.
You should be achieving these things. So so in a sense you know we're victims
of our own position of being out there in the public as being a regular feature
of economic news and announcements. One of the biggest challenges we've had
is just around asset prices. We're targeting consumer prices.
You drop interest rates or other asset prices start to rise.
And people think that that's you've targeted that you try to make that
happen. So so continued communication
willingness to to explain in ways that people other than just financial market
participants understand. And there is a non-trivial challenge
just to be at communicating being transparent.
But let's put it let's be frank. People are unhappy at the moment.
Inflation is too high. They've been kept at home for a long
time. It's been an ugly period for two years.
And this is one of the one of the wearying the costs of this pandemic.
It was always going to be a cost. It depended on how was it going to be.