Inflation expected to be under 3% by end of the year: Orr

Reserve Bank governor Adrian Orr expects inflation to be "under 3%" by the end of this year.

Aiming to eventually be between 1-3%, Mr Orr said the country was in "the last hard part", but lowering it further will take time.

Speaking at a Queenstown Business Chamber of Commerce breakfast at Heritage Queenstown yesterday, Mr Orr said the faster "price setters" had stopped increasing prices, the faster interest rates could be lowered, and the less unemployment there would be.

"The good news, we’ve gone from seven to four.

"We expect to be under three by the end of this year.

"You will see one chubby, former ginger dancing in the streets of Wellington when that number [is reported]."

However, the "sticky part" was domestic home-grown inflation — components which might be indexed to past inflation, such as excise tax, rates and insurance.

"[There are] a whole lot of small sticky parts to the inflation process that means going from seven to four can be quick, going from four to two will feel like a lifetime."

Reserve Bank governor Adrian Orr promises to dance in Wellington’s streets once inflation hits 3%...
Reserve Bank governor Adrian Orr promises to dance in Wellington’s streets once inflation hits 3%.PHOTO: TRACEY ROXBURGH
Mr Orr said the Reserve Bank could also start to ease interest rates "back to something more neutral", and GDP was projected to increase — 1% this calendar year and 2.5% to 3.5% over the next few years.

Despite the national population growing at 2% per annum over the past couple of years, New Zealand’s productivity record was the OECD’s lowest.

"If we have a problem, we pour more people into it", he said.

"Until we get capital deepening going on in the economy, we will remain in this space.

"We do not reinvest in our businesses and a lot of larger businesses are foreign-owned, meaning that dividend is going elsewhere.

"That is a fundamental thinking change that I still don’t see happening in New Zealand ... the more that productivity story is thought about, the easier it is."

"You have to get intergenerational investment happening and think beyond three-year investment cycles.

"Those are the big challenges for New Zealand."