Keeping inflation low and stable: why it matters
At Te Pūtea Matua, our job is to keep inflation low and stable, so prices don’t rise too quickly over time. This is important because inflation affects everyday costs such as food, rent and household bills.
To do this, we need to understand not just what’s happening in the economy today, but what’s likely to happen next.
We use data, models, research, information from households and businesses across New Zealand, and the experience of our economists to understand where the economy is heading and help us make decisions.
Why we need to look ahead
The economy is always moving, and the tools we use to influence it take time to work.
For example, when we change the Official Cash Rate (OCR), it takes about 18 months for the full effects to be felt across households and businesses.
That means we cannot rely only on what is happening right now. We need to look ahead.
Forecasting the future
Looking ahead helps us make decisions early enough to influence inflation before price pressures become harder for households and businesses to manage. We call this process forecasting.
Forecasting helps us connect:
- what's happening today
- what it means for the economy
- what could happen in the future
- how we should set the OCR to ensure inflation remains near 2% over the medium term.
What this means for you
We can’t set prices, control wages, or predict global events. But we can influence how quickly prices rise over time. We do this by setting the OCR to help keep inflation within our target range.
When inflation is low and stable:
- price increases are more manageable
- incomes have a better chance to keep up
- households and businesses can plan with more confidence.
General prices won't fall back to earlier levels, but slower inflation helps ease pressure over time.
Understanding today
No single number tells the full story, so we bring together many pieces of information from across the economy, including:
- economic data like inflation, employment, and household spending
- financial data such as interest rates, lending trends, and exchange rates
- economic models, combined with expert judgement
- global and local developments including news and international trends
- insights from across government and our own organisation.
We also talk directly with businesses and communities across New Zealand to understand what challenges they might be facing and how they are seeing the economy.
Before we can look ahead, we need a clear view of the present.
But in New Zealand, key economic data is often released with a delay and can be revised later.
To fill this gap, we estimate what is happening right now using the most recent information (models, expert judgment and analysis) available. This is called nowcasting.
For example, Gross Domestic Product (GDP) figures — New Zealand’s official measure of economic growth — can be released nearly 3 months after the quarter ends, so these estimates help fill in the gaps.
Looking ahead
We use economic models to understand how the economy works and how it might respond to change or events. A model is a tool that lets us test how different parts of the economy may affect each other.
These models help us explore questions like:
- What happens if inflation rises or falls?
- How do interest rates affect spending?
- How might businesses and households respond to changes?
Models help keep our thinking:
- consistent
- based on what economists know about how the economy usually works
- based on evidence.
But no model can capture the real world perfectly.
The economy is complex, and people do not always behave as expected.
That’s why we combine models with:
- expert judgement
- real-world insights
- experience from past economic cycles.
This is especially important during unusual events, such as financial crises or natural disasters.
Forecasting is not exact and there are always unknowns. That is why we update our view as new information comes in.
It’s important to remember that:
- data can be updated or revised
- some parts of the economy are hard to measure
- global events can shift the outlook quickly.
That’s why forecasts are best understood as informed estimates, not precise predictions.
That is also why we:
- regularly review our decisions
- adjust policy as conditions change
- aim to make decisions that can still work reasonably well when unexpected things happen.
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