Official cash rate decision: Reserve Bank Governor Adrian Orr 'honestly' believes inflation 'on its way down'

The Reserve Bank (RBNZ) Governor believes sky-high inflation is "on its way down".

It comes after the central bank raised the official cash rate (OCR) to its highest level in seven years on Wednesday - up 50 basis points to 3 percent - as it tries to tame inflation. 

RBNZ Governor Adrian Orr told AM New Zealanders' spending remained "incredibly resilient" and supply could still not keep up - but there were indications of the pressure easing.

"People are still spending but we are seeing the initial signs of slowing," he said on Thursday. "You're seeing global inflation coming off… in part through energy and food prices.

"Beyond that, there are signs of slowing growth, labour resources becoming more available and inflation pressures easing."

Orr said the continued labour shortages around the world were the biggest surprise to the RBNZ.

"I've never seen that happen internationally, simultaneously," he told AM host Melissa Chan-Green. "This has been a global economic shock - the first one internationally in 100 years around a pandemic.

Adrian Orr.
Adrian Orr. Photo credit: AM

"When you look at it, globally, New Zealand sits at the lower end of global inflation at the moment so while the Reserve Bank has had a role in inflation, it can't be the only role because we only deal with New Zealand's inflation rate.

"We're working our way through and I honestly believe inflation is on its way down and that the course of time will show that."

That was a view largely shared by Milford Asset Management investment analyst Katlyn Parker, although she noted New Zealand was still "miles off" the RBNZ's 1-3 percent inflation target range.

Inflation came in at 7.3 percent in the second quarter of this year. 

"If you look at those forecasts altogether, it does paint a relatively optimistic scenario that things are going to, very nicely and slowly, come to a slow end versus an abrupt halt," Parker told AM.

But she said a future recession shouldn't be ruled out.

"Adrian Orr, he said himself that he doesn't foresee a recession but I wouldn't be putting my money on this 'Goldilocks scenario' actually eventuating," Parker said. "It's a very, very tough thing to engineer."

The OCR is now more than 10 times what it was in October.