(Bloomberg) -- New Zealand’s aggressive monetary policy tightening is having the desired effect of slowing the economy, Reserve Bank Chief Economist Paul Conway said.

The Official Cash Rate “is now comfortably above neutral and having the desired contractionary effect,” Conway said in a speech Thursday in Wellington. “Consistent with this, there are welcome signs demand in the economy is slowing.”

The RBNZ has hiked the OCR by 450 basis points since late 2021, and is tipped to raise the benchmark by another 25 points to 5% at its next review on April 5. The economy contracted 0.6% in the final three months of 2022 and is forecast to enter a recession this year as spending slows and the housing market slumps.

Conway said the RBNZ is “incredibly determined to get inflation and inflation expectations back to target.”

New Zealand’s dollar rose after the comments, buying 62.49 US cents at 2:31 p.m. in Wellington.

The effects of the policy tightening “are still percolating through the economy” and the RBNZ assumes this will impact consumer spending in a similar way to previous cycles, Conway said. 

Still, there are a number of uncertainties that policymakers face when they set rates, he said. That includes the impact of the rebuild after the recent cyclone and flooding events.

“If the rebuild generates inflationary pressure, interest rates would increase, reducing demand and freeing up resources for the rebuild,” he said. “Alternatively, diverting government resources from projects elsewhere in the country or funding the rebuild via increased government revenues would free up resources without the need for higher interest rates.”

OCR Peak

Another uncertainty growing increasingly pertinent as the RBNZ nears the interest-rate peak is knowing when monetary policy has done enough to get inflation comfortably back to target, Conway said. 

“The rapid speed of rate increases creates additional uncertainty about how the effects of the tightening will play out,” he said. “It is also unclear whether inflation expectations are falling fast enough to mean current and projected OCR settings are consistent with positive real interest rates, and thus likely to be disinflationary.”

Speaking to reporters after his speech, Conway wouldn’t be drawn on the policy implications for the RBNZ of the offshore banking crisis other than to say the banks it regulates are “in sound financial shape.” 

He also declined to comment specifically on the fourth-quarter economic contraction, which contrasted with the RBNZ’s prediction for 0.7% growth, saying it was something for the Monetary Policy Committee to consider.

“How much of that GDP out-turn is signal and how much of that is noise, that’s exactly the kind of thing that we’ll be kicking around,” Conway said.

(Updates with currency gain in fifth paragraph)

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