“Even if you thought that they would be coming to neutral that's a higher rate than it was in previous years,” he said in an interview. “If you think about trending growth plus target inflation, you might be getting more closer to 4%. It's always hard to pin down and there's very large standard errors around any estimates, but I'd probably say [the range] is more 3.5-4%."
Still, Krippner thought it most likely that neutral lies in the lower end of his range, and that the RBNZ’s cash rate remains below it.
At some point the cash rate may need to enter accommodative territory to support the economy due to global trade uncertainty, he said, despite concerns about a potential rise higher in inflation. (See chart below)
“They're probably worried enough about inflation,” he added, pointing to persistently high non-tradable price rises and the New Zealand dollar, which had weakened about 12% against the greenback since October to 1.78. “[The RBNZ] is still worried enough about whether inflation's going to come down successfully to the target and that they don't want to be caught in the position of over easing.”
The RBNZ's OCR track, which had the rate at 3.1% by December, likely accounted for these upside inflationary risks, while providing immediate stimulus to the real economy, he added.
Governor Adrian Orr has signalled a further two 25bp cuts this half and a third in H2, though Deputy Governor Christian Hawksby told MNI the RBNZ would likely not need to ease below its neutral estimate. (See MNI INTERVIEW: RBNZ Deputy Sees OCR Dip To Neutral, No Further)
FAILED FORECASTS
Krippner thought New Zealand’s small and narrowly-focussed economy could stabilise this year as Asian demand for its agricultural products improve, pointing to a recent recovery in dairy prices.
But he criticised the Bank’s forecasting fails over 2024 and the refusal of its leadership to admit to errors.
“When I go back to May or even February last year, things have turned around quite markedly in terms of where they're now projecting the OCR to be in 2025 and 2026,” he said.
While GDP had been revised lower, not enough had changed within the data to account for such a significant shift to its OCR projections, he continued, calling for a more in-depth, external review of the Bank similar to Ben Bernanke’s audit of the Bank of England’s forecasting.
The RBNZ currently conducts its own internal review every five years, with the next due in 2027.