Purchasing power and affordability are front of mind, with inflation expected to rise in the near term while wage growth lags. Reserve Bank Chief Economist Paul Conway joins Ryan Bridge to discuss the role of monetary policy in supporting purchasing power, and why New Zealand continues to face challenges with productivity.

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Bridge talks Business: 31 March 2026
Episode Transcript

Ryan Bridge
Kia ora and welcome to episode 69 of Bridge talks Business with Milford. This week I sit down with the Chief Reserve Bank Economist for his sit-rep on the war and the economy. Paul Conway says the RBNZ will look through short-term spikes in inflation which could go as high as 4%, maybe even higher. That begs the question, what does short-term mean and how high is too high? First, here’s your top five.

1. Iran still the big story this week, things have escalated. US Marines have arrived in the region, the Iranian proxy group the Houthis, they’ve joined the war firing ballistic missiles at Israel.
2. The arrival of the Houthis is important. They have the ability to disrupt another key shipping channel around the Red Sea where 10% of global energy transits. Any disruption here would add to the 20% already offline in the Strait of Hormuz.
3. Global PMIs were released last week which hinted at what’s to come war-wise. Growth in most regions weaker, inflation metrics up which points to potentially stagflation, i.e. inflation surges given the energy cost but growth is subdued.
4. Markets continue to price in a number of interest rate hikes in many markets although in some regions the extent of this pricing now looks at odds with the likely economic outcomes. Many regions are entering this conflict from a very weak economic starting point, with lots of slack meaning second round inflation is less likely than 2022.
5. In the week ahead again the focus on how the Iranian conflict evolves. We also have US jobs data, we’re expecting a pickup after the weak prior month reading.

Alright, let’s crack into it. This week in the hot seat is Paul Conway. He’s the Chief Economist at the Reserve Bank in Wellington and he is joining us in studio for a chat. Just a reminder that this segment is informational only and should not be considered financial advice. Paul, welcome to the podcast.

Paul Conway
Thanks, Ryan. Thanks for having me. Nice to be here.

Ryan Bridge
Great to have you here all the way up from Wellington. So let’s talk about that speech that you have delivered on affordability, purchasing power. Why have you decided to talk about this in particular?

Paul Conway
Well, A) it’s a pretty pertinent issue. The last few years have been difficult economic times, very turbulent times for New Zealanders. And there has been this theme of a cost of living crisis in New Zealand. So I really wanted to sort of talk about that, to unpick it. And what exactly is that about? It’s not just about prices, it’s about incomes as well. But the other thing I really wanted to get across is what’s the role of monetary policy in improving purchasing power? What can we as monetary policy makers do, and importantly not do, to lift purchasing power in New Zealand? And what’s the role of other areas of policy as well?

Ryan Bridge
Alright. Let’s talk about purchasing power and what it actually means. So you’ve got prices and you’ve got wages, basically.

Paul Conway
That’s right. And it’s the mix of them both. So it’s ultimately about what you can buy with your wages. How far does your wage packet go? And I spent a bit of time in the speech saying that prices in New Zealand are quite high when you just look at price levels. And in fact, prices for like construction, some food products, some household utilities, according to the data we’ve got, is among the highest in the OECD, which is a little bit disconcerting for us down here. And then I sort of go on to say, you know, that wouldn’t matter if wages were also high in New Zealand. And there is a relationship across countries. You do see that higher income OECD economies tend to be more expensive economies. We’re a relatively expensive economy, but we don’t have the same thing going on, on wages, unfortunately. And when you put all that together and purchasing power in the New Zealand economy is at best around average across 38 OECD economies and a bit below average when you compare it across 20 higher income OECD economies.

Ryan Bridge
OK, let’s separate those two things out and talk about the wage side of it, why we’re not as good as we could be. But with the prices, why is it so expensive in New Zealand? Is that because we’re just far away from stuff?

Paul Conway
That’s a huge part of it. Like ultimately, it comes down to our productivity performance. So if someone is more productive at work, if you’re creating more value from an hour of work, then the employer can pay higher wages without having to put their prices up to compensate. So you’re creating more value for each hour of work. And we struggle with productivity. It’s kind of the Achilles heel of the New Zealand economy. And I think ultimately the reason for that is what we call economic geography. So the fact that we’re a small economy, we’re sparsely populated. We’re the size of Japan with five and a half million people on it. We’re islands and mountainous and all of that. Infrastructure is a challenge. And also we’re a long way from global markets. So the fact of us being very distant, the last bus stop on the planet is another thing that sort of erodes our productivity performance. So it’s very hard in New Zealand to get markets where there’s big players, because scale is important for driving productivity, that are really sort of competing hard against each other. And competition is another key driver of productivity.

Ryan Bridge
So, there are positive aspects to this being so far away. We’re not getting hit with drones. We don’t have immigration problems at the border like other countries and jurisdictions have. But obviously we are reliant on, and at the moment we’re seeing with fuel – and we’ve got to get it here. And we’re the last stop on the bus stop. So how do you see the whole Iran situation, Middle East situation feeding into affordability?

Paul Conway
Well, it’s negative for affordability. The fact is, you know, we are reliant on oil or, you know, refined petroleum products. We get a lot of it out of Singapore, which uses crude coming through the Middle East. So, you know, we’re even though we’re a long way away, we’re still exposed to global oil markets. So this oil shock, the conflict in the Middle East, it’s clearly going to lead to higher inflation in the short run. Back in February, we were talking about inflation kind of settling over the next 12 months back to the 2 percent level, the midpoint of our target. And we’ve, you know, we’re back into it in a couple of weeks with our April monetary policy review. And as the Governor talked about yesterday, we’re going to have higher inflation than we were forecasting in the near term.

Ryan Bridge
So higher inflation and we’re not going to see productivity increase anytime soon. What do we need to see to get that productivity?

Paul Conway
Well, you know, we might. I think there’s no inherent reason why we can’t be a more productive economy. You know, yes, economic geography has been a handbrake on our productivity, but I don’t think it’s our economic destiny. I think technology is moving in ways that mean, you know, remoteness can be an asset even, you know, we’re awake when most of the world is asleep kind of thing. So there’s opportunities for us in that as well. So, you know, I think there’s no reason why New Zealand can’t be a high productivity or high productivity growth economy. And just to be clear Ryan, on that inflation that we’re expecting, that’s in the near term. That’s over the next few quarters. If it sort of persists into the medium term, if people sort of bake higher inflation into their pricing behaviours if you’re a firm, or your wage demands if you’re a worker, you know, those are the second round inflation area effects that the monetary policy committee would lean against in the form of higher interest rates.

Ryan Bridge
So in the short term, if the inflation goes up, then it’s not necessarily panic stations – let’s hike the rates.

Paul Conway
Absolutely.

Ryan Bridge
It’s look through it and then see what happens after that with the second wave, if you like.

Paul Conway
That’s exactly right. Like there’s nothing we can do to prevent inflation being higher in Q2 of this year, for example, even if we increase the Official Cash Rate now, you know, that inflation is headed our way. There’s nothing we can do about it. So the optimal response from the Central Bank is to look through that. The Governor was very clear on that yesterday that that’s our framework. But at the same time, the committee is very vigilant to any signs of inflation kind of feeding in to those second round effects, which is more sort of about the medium term. You know, changes in interest rates today have their peak impact on inflation a year, 18 months down the track. So that’s where we can sort of influence inflation and anything that’s sort of shorter term than that, we have very limited ability to control.

Ryan Bridge
Paul, can you just give people a sense of what the Reserve Bank actually does? How what you’re talking about purchasing power, you know, obviously the OCR, but how that affects affordability, how monetary policy interacts with it?

Paul Conway
Yeah, absolutely. So, Central Bankers, we say this a lot if you know, if people listen to Central Bankers, they’ll say the best contribution that monetary policy can make to longer term prosperity and affordability in this context is to deliver low and stable inflation. Because when inflation is low and stable, it’s easier for businesses to plan. They’re not sort of dealing with escalating costs. They focus more on investment, focus more on how they can grow, how they can do what they do better, which is the essence of productivity growth. So we can sort of lay the foundations with low and stable inflation for productivity growth, but we can’t create it on our own. You need other areas of government policy and ultimately decisions taking place in the private sector. You know, that’s where the rubber hits the road in terms of productivity. So we are part of the solution, but we’re not the whole solution.

And I think, you know, people often sort of give monetary policy an outsized sort of responsibility in some ways. I think because we’re in the media a lot, people think that monetary policy is economic policy, but you know, tweaking interest rates here and there to control inflation. You know, that’s as I said, it’s the foundation for long run prosperity, but it takes a lot of other stuff, other pieces of the jigsaw puzzle to come together, before we get what we’re after.

Ryan Bridge
You’re the calm seas. We need someone with a boat and a captain to sail that thing.

Paul Conway
Yeah, that’s a nice way to put it.

Ryan Bridge
I’m good at those. Paul, lovely to see you. And thanks so much for being on the podcast.

Paul Conway
Pleasure Ryan. Thank you. Nice to see you too.

Ryan Bridge
That was Paul Conway, Chief Economist at the Reserve Bank about affordability, purchasing power, that relationship between how much you’re earning and how much we’re paying for stuff and what the Reserve Bank can actually realistically do about it. It’s not just up to them. Thanks so much for listening. As always, you can like, follow and subscribe wherever you get your podcasts. Until next week, don’t forget to invest in yourselves.

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