Adrian Orr, governor of the Reserve Bank of New Zealand (RBNZ), admitted the bank was engineering a recession to lower inflation.
The remark comes a day after the central bank raised the official cash rate (OCR) by a record 75 basis points to 4.25 percent.
In its monetary policy statement (pdf), the RBNZ revealed the economy is expected to enter a recession in 2023.
“This economic contraction will, in part, be a result of higher interest rates, as the Reserve Bank acts to reduce inflation and return employment to a more sustainable level,” it said.
Speaking to the Finance and Expenditure Committee, Orr said actual and expected inflation is too high and needs to be reduced.
“The committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium-term,” he said in his opening statement.
“Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.”
Responding to a question that the RBNZ was purposefully engineering a recession to combat the current sustained period of high inflation, Orr admitted it was.
“I think that is correct,” he said. “We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth.”
What New Zealand’s Recession Is Expected to Look Like
Orr warned that Kiwis should brace for a very “shallow and short” period of negative GDP growth.
“What we are looking at is a one percent of GDP slow down over the period of three to four quarters in the second half of next year into 2024. So that’s one percent,” he said.
The governor also offered an apology to households for the hardships they were facing in the current economic environment.
“On behalf of the Monetary Policy Committee, we are sorry that New Zealanders are being buffeted by significant shocks and inflation is above target. As we’ve said before, inflation is no one’s friend and causes economic costs,” Orr said.
The RBNZ originally expected inflation to begin falling during the September quarter. However, figures revealed it remained stubbornly high at a near record 30-year high of 7.2 percent.
This prompted the central bank to ramp up its current aggressive tightening cycle.
The chief economists of both ANZ and ASB banks expect another 75 basis point hike for the next decision in February, followed by a 50 basis point hike in May.