MNI INTERVIEW: RBNZ's Single Price Focus To Stall Rate Cuts

The Reserve Bank of New Zealand’s sharpened focus on price stability will make it less inclined to lower rates and slower to react as the economy decelerates faster than expected, in part due to government spending cuts, a former RBNZ board member told MNI.

“The bank is doing its job – [the RBNZ] has been very focused, it's doing what it is being asked to do by the government,” said Suzanne Snively, stressing that the new centre-right government had given Governor Adrian Orr and the Monetary Policy Committee a clear remit to control inflation when it removed the employment goal from the RBNZ’s mandate in late 2023.

"[The Government] appears to expect the RBNZ to be late to reduce the OCR so that they get prices down," she said, adding that the Bank’s remit had put inflation "absolutely foremost in its thinking."

Snively, former board member between 1985-1992, transition board member in 2022 and chair of the independent experts advisory panel that led the 2017-2022 RBNZ Act review, declined to predict when the Reserve Bank, which made its last change to the Overnight Cash Rate when it hiked by 25 basis points to 5.5% in May 2023, could begin to ease policy. (See MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight)

The RBNZ's most-recently published Monetary Policy Statement increased its end-of-year OCR prediction 10bp to 5.7%, though swaps markets have consistently priced in cuts by the end of the year. Annual inflation fell to 4.0% in the first quarter, and two-year ahead inflation expectations declined to 2.33% in the second quarter from 2.5% in the first.

SINGLE-FOCUS SHORTFALL

The sole focus on headline inflation neglects some drivers of economic activity to target lower demand, according to Snively, who noted that price rises and falls were not uniform.

“Whereas there were a number of factors impacting and determining inflation, such as our supply-chain constraints, which an economy like New Zealand cannot control,” she added.

Pointing to recent consumer confidence results – the Westpac McDermott Miller Survey this week fell 11 points to 82.2 in June, retracing gains made over the last six months – Snively said New Zealand’s consumers are feeling the impact of both inflation and the effects of the OCR, and noted that, as the government seeks to cut costs, that 38-40% of public expenditure is carried out through procurement of contractors.

"With uncertainty over where direct cuts will be made, less work has been procured by the public sector, which has had a significant impact on private contractors, reducing their revenue to the extent that they have had to shed staff," Snively said, adding that this will decrease tax revenue.

"This is something that the RBNZ wouldn't typically pick up on because its labour-market modeling is too high level. The Reserve will also now refocus where it puts its modeling effort due to the single mandate.”

While GDP grew 0.2% y/y in Q1, snapping two quarters of negative growth (see chart), Snively warned against relying on lagging indicators. The economy could be slowing faster if viewed in a more disaggregated way that accounted for both the private and public sectors, she argued.

FURTHER CHANGE

The government will likely implement other central-bank reforms this year. (See MNI: RBNZ To Lose Dual Mandate Within 100 Days- Ex Staff)

While Snively pushed back against suggestions made by some former RBNZ staff for the government to curtail the central bank’s independence and hold it to a higher level of accountability, she suggested members of the MPC could communicate more with the public about their view of the OCR's impact on the economy following decisions.

"We worried, because New Zealand is such a small economy, independent MPC members’ differing views might be personalised or politicised – it would be hard for individuals to speak out without being branded," she noted. "With hindsight, I think at the very least, it would be good to have alternative views expressed, even if they're not to specific individuals, as it gives the public a better way of understanding these issues, which are not as black and white as the current discussion about inflation has become."