Tuesday 16th April 2024 |
Text too small? |
15 April 2024
Due to New Zealanders’ high inflation expectations, the Official Cash Rate (OCR) would currently need to be about 3.9 percent to neither tap the brakes nor push on the accelerator of the economy, the Reserve Bank’s new Bulletin article shows. The current OCR – at 5.5 percent – is reducing capacity pressures and inflation in New Zealand.
This Bulletin article explains how we construct, use, and think about indicators for the neutral interest rate (NIR) at Te PÅ«tea Matua - the Reserve Bank of New Zealand (RBNZ).
When an investor considers their return on an investment, they are not merely interested in how many dollars they will receive in the future, but also how many goods and services they can purchase with those dollars. Therefore, their real rate of return can be calculated by subtracting expected future inflation from the nominal interest rate they invested at.
Likewise, it is the real NIR – the nominal NIR adjusted for inflation expectations – that matters for spending and investment decisions. However, the OCR is in nominal terms. So, to assess the stance of monetary policy, we need to adjust the real NIR for expected future inflation - from the short term, out to 10 years – to get an estimate of the nominal NIR.
Currently, with elevated inflation expectations, the “neutral” OCR is around 3.9 percent – our average short-term nominal NIR. This compares with the actual OCR of 5.5 per cent, which is therefore clearly contractionary.
As inflation expectations continue to decline, a lower OCR would be considered a “neutral” rate. For example, our average of 5 different real NIR estimates adjusted to an average long-term nominal NIR suggest that an OCR of 2.5 percent would be neutral.
The OCR (green line) is reducing inflation in New Zealand.
Figure 4: The nominal NIR estimates over different horizons
No comments yet
KPG - Changes to the Kiwi Property Board
IKE - Timing of Quarterly Performance Update and Conference Call
January 17th Morning Report
ERD - Appointment of Interim Chief Financial Officer
Meridian Energy monthly operating report for December 2024
PaySauce Quarterly Market Update - Dec 2024
CHI - FY24 Results Date and Audio Conference Details
AIA - December 2024 Monthly traffic update
January 15th Morning Report
PF - Details of Interim Results Webcast