Reserve Bank governor Adrian Orr says government spending policies needed to be targeted to those in need and kept in place only for as long as they are needed. Photo:
Reserve Bank governor Adrian Orr has repeated the country's inflation rate is too high, but says the economy is relatively well positioned to meet challenges.
He told an industry conference that New Zealand's financial system was able to support the economy with banks' capital and liquidity positions strong, and profitability and asset quality high.
Orr said a recent visit to the International Monetary Fund and World Bank meetings showed challenges to the world economy were large and upon developed economies.
He said the common view and approach of central banks was to raise interest rates to combat inflation by slowing domestic spending.
"This means employment prospects will be increasingly compromised, as people delay their spending and investment decisions.
"Rising nominal interest rates globally are, and will continue to, test the resilience of the financial system and all economic participants."
Orr said other factors thrown up by the battle to contain inflation included the shift of capital to safe assets, a rise in the US dollar, and tension between central bank actions and government spending policies to support at-risk groups.
He said four common solutions were presented at the IMF/World Bank discussions.
"Inflation needs to be contained in a goldilocks manner, where tightening is sufficient to tame inflation expectations, but without sending countries into a deep recession."
Government spending policies needed to be targeted to those in need and kept in place only for as long as they were needed, financial systems needed to be resilient, and economies needed ongoing reforms to improve productivity.
"The four steps to ongoing economic resilience are firmly within the New Zealand way of doing things. We are in relatively good stead," Orr said.
"However, there will be stresses in business and amongst households as interest rates and asset prices adjust. Of critical importance to overall financial stability will be the robustness of the labour market."
He mentioned briefly that monetary policy remained "firmly focused on meeting our inflation target".