Soft landing for inflation? A hard ask

Inflation will be hard to tame, according to former New Zealand Prime Minister and current ANZ NZ chair Sir John Key. And preventing a “hard landing” resulting from tightening measures looms as a difficult task for policymakers.

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Inflation will be hard to tame, according to former New Zealand Prime Minister and current ANZ NZ chair Sir John Key. And preventing a “hard landing” resulting from tightening measures looms as a difficult task for policymakers.

Speaking with ANZ Chief Economist Richard Yetsenga on podcast, Key said he would be “surprised” if central bank attempts to curb inflation without any unintentional economic consequences were successful.

He said a combination of rising consumer costs, wage pressures and regionally specific issues meant further tightening measures were not off the table, particularly in ANZ’s home markets.

“[Conditions] might force central banks to really, really have to tighten,” he told Blue Lens on Mic. “And if they do, at some point, it's very hard to see how that ends in a soft landing, in my view.”

Yetsenga agreed the cycle – and history – were against central banks but said strength in consumer balance sheets “hopefully means the landing is not too bumpy”.

“There probably will be some bumps,” he said. “And in a way, as you suggest, there needs to be, to bring inflation psychology back to a more even position.”

You can listen to the conversation on podcast in full below or click here to read an edited transcript.


Choke points

Key said labour-market mobility, capital and productivity loomed as ongoing issues needing to be properly addressed in the battle against inflation - even if moves are initially unpopular.

“I think in the end, if you want to resolve these issues, you ultimately need to unblock the choke points,” he said.

“I think you've got to do the things that aren't very sexy, in terms of an announcement when you're a prime minister or a politician, but actually long term put the economy on a footing where it actually can give you real and productive growth.

“It's a little different to the sugar hit of just throwing money at people.”


New Zealand in particular still had a way to go before rising rates began to chip away at inflation, Key said.

“Unlike Australia, where [the style of home loans are] 80 per cent floating and 20 per cent fixed… in New Zealand they are 80 per cent fixed and 20 per cent floating,” he said. “It takes a long way to flow through.”

He said NZ’s tight labour market, with wages increasing, was an important factor limiting the effectiveness of any monetary policy.

“Wage rounds are going through and if we look at source income, what we see is that, for ANZ customers, their source income has risen about 5.5 per cent in the last 12 months,” Key said.

“At one level they're going to face these increases - and it's obviously not just interest costs, it's energy and it's everything (including) the cost of a latte. But they’ve also got pay rounds that are mirroring that.”


Inflation was in many ways inevitable, Key said, given the response to the COVID crisis saw many countries “flooding the system with cash” to restore confidence in markets.

“Of course, at some point inflation was going to show up in the system,” he said. “And it came along, I think, for a variety of different reasons, from supply chain issues right through to labour shortages.”

Now entrenched, and set to increase before it gets better, a soft landing looks a long way away, Key said.

“As you know better than anybody else,” he told Yetsenga, “Inflation is as much about expectations as anything else. And now the expectations are that prices will rise.

"I think putting that genie back in the bottle is not easy. I mean, in theory, you can get a soft landing. But this is what you’re countering against.”

Key also touched on the importance of the free market, the implications of slowing growth in China, and the transition to net-zero carbon in ANZ’s home markets of Australia and New Zealand. Listen to the podcast above to find out more.

Shayne White is Content Manager at ANZ Institutional

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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