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In a speech delivered today at the ANZ-KangaNews New Zealand Capital Market Forum in Wellington, Mr Conway says: “The supply capacity of the New Zealand economy has been dramatically constrained over recent years by the COVID-19 pandemic, Ukraine war, and recent domestic cyclone. The Monetary Policy Committee has been increasing the Official Cash Rate (OCR) to bring demand back into balance with the reduced supply capacity of our economy.”

In his speech Mr Conway discusses 3 key areas — why inflation is currently high, the factors affecting the outlook for inflation and what the Monetary Policy Committee is doing about it.

“Higher interest rates reduce demand by encouraging people to spend less and save more, which reduces inflation pressure in the economy. As in many countries around the world, we expect this monetary policy tightening to cause the New Zealand economy to enter a mild recession later this year as demand slows,” he says.

“However, the depth and persistence of any recession depends on peoples’ behaviour. The more that businesses and workers absorb cost increases in their real profit margins and real wages respectively, the less monetary policy will need to tighten and the sooner inflation pressures will ease. The converse applies,” Mr Conway says.

Read Paul Conway’s speech

Key points outlined in the speech

Inflation is high and widespread

Inflation is high and widespread because strong demand outstripped supply and businesses passed on higher costs and workers sought higher pay to compensate for higher prices. Fiscal and monetary responses to the pandemic supported demand while health measures and other shocks worsened the supply of products and labour.

We are worse off because of the pandemic, the war and floods

Monetary policy cannot do anything about the loss of real income stemming from these events.

Monetary policy is lowering inflation

We are lifting interest rates to ensure persistence in inflation above our inflation target is squeezed out of the economy. We are incredibly determined to get inflation and inflation expectations back to target.

Returning inflation to target could be made more difficult

Returning inflation to target could be made more difficult if businesses and workers try to push up their real profit margins and real wages to make up for the inflationary impact of the COVID pandemic, the war in Ukraine, and storms in New Zealand. That would mean Monetary Policy would need to be more contractionary for longer and a deeper recession would result.