MNI INTERVIEW: RBNZ To Cut Mid-Year, Despite Tough Talk

The Reserve Bank of New Zealand will maintain a vigilant stance on inflation and refrain from discussing cuts in the near term as non-tradable inflation remains above the upper end of its targets, however, considerable economic headwinds could force it to cut mid-year despite its tough talk, a former staffer told MNI.

Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, said the Bank will likely cut the Official Cash Rate by July or August. “That domestic non-tradable component [of inflation] will start to fall in my view due to subdued economic activity,” he added, pointing to recent weak retail trade figures. “Investor and consumer confidence are still quite low, while there are increasing concerns on rising unemployment admittedly from a very low base.”

New Zealand’s Consumer Price Index rose 4.7% y/y over the December 2023 quarter, down from Q3’s 5.6% and in line with market and RBNZ expectations. However, non-tradeable inflation was 5.9% y/y, or 1.1% over the quarter, higher than the 0.8% foreseen by the market. Markets have priced in a 5.2% OCR by the July 10 meeting. The bank has held the OCR at 5.5% since it last hiked it 25bp to 5.5% in May 2023.

RBNZ Chief Economist Paul Conway will deliver a presentation on Jan 30 about changes to the economy and its impact on monetary policy. Mortlock doubted Conway will mention OCR cuts due to the high non-tradable result, though pressure on household budgets coupled with higher unemployment and public sector layoffs will likely drive non-tradable inflation lower over the coming months.

The Q3 2023 GDP result showed New Zealand had entered a mild contraction and when adjusted for population growth, the country was likely in a per capita recession, he added. But a wider Middle East conflict or a more buoyant U.S. economy still risked adding upward pressure to inflation this year, he argued.

RBNZ REFORM

Mortlock expects the newly-installed government to press on with reforms calculated to add greater accountability and urgency to the RBNZ’s inflation fight this year. (See MNI INTERVIEW: RBNZ Reform To Add Urgency To Inflation Fight)

The government also needs to update how the RBNZ’s board operated and add monetary expertise to the monetary policy committee. “I think they need to also look at the way the Reserve Bank is using macro prudential policies,” he added, pointing to a recent consultation proposal to constrain bank lending via debt to income ratios for financial stability reasons. Currently, the RBNZ wants to moderate house price inflation “as an end of itself for equity and welfare reasons, which is not part of its mandate,” he said.

“There's some pretty muddled thinking in relation to micromanagement by the Reserve that needs to be tackled. The government needs to strengthen the performance model of the Reserve Bank. Operational independence is really important for central banks and I support that, but with autonomy comes accountability.”