Economy can handle higher interest rates, Reserve Bank boss says

Source: 1News

Interest rates are expected to keep rising but the New Zealand economy can handle it, Reserve Bank Governor Adrian Orr says a day after raising the Official Cash Rate.

Inflation led the Reserve Bank to raise the official interest rate from 1.5% to 2% on Wednesday, with Orr predicting that the OCR could continue to rise.

"We're saying it's likely to be around 4%, that's by middle of next year and that's subject to the economy unfolding as we see it and the way we see it is a very robust economy that we are very resilient to higher interest rates."

The aim is to slow the growth in spending so inflation is maintained, Orr told Breakfast on Thursday.

"At the moment inflation is too high, our spending, our demand for goods and spending is well above our capacity to supply that and so we need to constrain demand growth.

"The level of demand can still remain very high but we need the supply capacity to catch up otherwise all we're doing is creating inflation," he said.

Orr added that interest rates are starting to return to normal after they were low during Covid-19.

“What I’ve always said on the show is get perspective, have a look at the longer-term time trends around nominal interest rates and remember that the last two years or so were the exception, it was a Covid-19 shock, interest rates globally were historically low, that is not average.

READ MORE: Official interest rate hiked as inflation continues to bite

"So we're returning back to more normal," he said.

Orr also had a word for critics who had called in the last few years for the Reserve Bank to respond to rising house prices.

"I do want to say on this show, I’ve only ever been told on this show that house prices are rising, that this is silly. Well guess what, house prices are easing now. This is why monetary policy does not target house prices.

"House prices are easing, cheaper to buy, likewise the cost of servicing a mortgage is going up so you know, those are the balances we don't influence that you do as investors, as homeowners."