Following the RBNZ’s decision to keep the OCR at 2.25% yesterday, Assistant Governor Karen Silk emphasized that the economy can grow even as inflation moderates.
She acknowledged that the idea may appear counterintuitive but argued that the output gap provides room for above-trend growth without reigniting price pressures. But, according to Silk, the presence of spare capacity allows output to grow above potential temporarily without reigniting inflation.
Silk described risks around the projected cash-rate path as balanced. While some sectors are showing signs of recovery, consumption remains subdued. At the same time, she warned of upside inflation risks if firms facing squeezed margins begin raising prices more aggressively.
The RBNZ estimates the neutral cash rate at around 3%, suggesting policy is still accommodative. Current projections show only a gradual move toward that neutral level by late 2027. “That’s a reflection of that spare capacity that exists within the economy and the time it will take for that to be absorbed,” Silk said.
