The transition that has been under way for some time in parts of the world will probably materialize this month in New Zealand. Just don’t expect it to sound like much of a shift. The step down is unlikely to result in anything so modest as the quarter-point increase executed by the Federal Reserve last week. Economists have been busy scaling back their forecasts, with at least some now anticipating a climb of half a percentage point in the main Kiwi rate on Feb. 22. If commentary from the Fed, Bank of England and the European Central Bank is anything to go by, the RBNZ will pepper the decision with protests that it isn’t the end of hikes. Their stance will be restrictive for some time to come — mission unaccomplished and so on.
Don’t let that obscure what’s happening. Once the boom is lowered from the record 75-basis-point hike undertaken in November, it’s going to be hard for Governor Adrian Orr to go back up in the absence of something truly scenario-shattering. More likely is some indication that a pause is on the horizon, though the bank may not want it described as such. Not because a breather is off the mark, but because the bank won’t want a “cut” narrative to shape the thinking of companies and consumers, let alone investors. JPMorgan Chase & Co. predicts an increase of half a percentage point and then an extended sabbatical. “We are nearing the end of the hiking cycle,” Tom Kennedy, an economist at the firm wrote in a recent note.
There are sound reasons for New Zealand to dial back the hawkishness, in substance if not rhetoric. While inflation is elevated, it’s falling short of the central bank’s pessimistic projections. Consumer prices rose 7.2% in the fourth quarter from a year earlier, less than the 7.5% for which Orr’s team had braced. The labor market is very tight, though loosening its grip a little: The jobless rate inched up to 3.4%, a smidge more than analysts had foreseen. Still low? Yes, but with the a recession in the offing, it’s hard to see the job scene improving from here.
And about that downturn? Yes, it’s something desired by Orr. Asked at a parliamentary committee hearing late last year if his objective was to generate a recession, the governor responded: “Yes, that is correct. We are deliberately trying to slow aggregate spending in the economy.” Give him points for candor. It’s hard to see Fed boss Jerome Powell fronting a Senate panel with the same forthrightness. Usually, Fed folks respond to questions about a slump with something along the lines of “it’s not in our forecast” or “there’s a narrow path to a soft landing.”
The problem with leaning into, or even bragging about, a recession is that at some point the pain starts to register. Although most central banks are independent of the government — as is New Zealand’s — the environment in which they operate is political, and decisions can have electoral impact. Lawmakers fretting about holding onto their seats can easily challenge policymakers: OK, so now you got your recession, what do you do about it? In an environment where inflation was seen as the greater initial evil, as has been the case since 2021, bankers are inclined to intone that the best way to encourage sustainable long-term growth is to foster price stability.
The good news is that inflation is coming down in many major economies and there appears little appetite to jack up borrowing costs to levels approaching that of the Paul Volcker era — despite all the comparisons with the iconic former Fed chair that were popular last year. The Fed’s benchmark rate touched 20% in 1980. It is now in a range of 4.5% to 4.75%. The greenback is retreating against many currencies, mainly due to expectations the Fed is close to wrapping up its tightening campaign. The NZ dollar is up about 6% in the past three months.
Its small economy and remote location notwithstanding, watch how policy develops in New Zealand. The country loves to be first in the class. The RBNZ was a trailblazer on inflation targeting, adopting a goal of around 2% three decades ago, an aspiration that has become widespread. Kiwis don’t mind emphasizing how they are often among the initial movers when prices start to get off the floor, as they were in 2021.
If there is even a whiff of something less than tough love this month, we’ll know we are in a new place — however much policymakers may protest.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
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