Waiting on the Reserve Bank


Peter Nicholl

The year 2023 is finishing with more gloomy economic news than good news. But I will start with the good news. Inflation is on the way down again globally and in New Zealand. House prices have stabilised in New Zealand and may even be beginning to rise a little. Despite a strong flow of New Zealanders moving to Australia, we have had a record increase in our population because of strong inward migration. That tells you a lot about the state of the rest of the world.

On the downside, our current account deficit in the year to September, 2023 was a whopping 7.6 per cent of gross domestic product and our GDP fell in the September quarter, despite the strong growth in population. On a GDP per capita basis, it fell a large 0.6 per cent. It took the Reserve Bank and others by surprise. The Reserve Bank had forecast a rise of 0.3 per cent only a short time before. This is a concern as the Reserve Bank bases its policy decisions on its forecasts. If its forecasts are wrong, its policies will be wrong too.

The Reserve Bank said in its last Monetary Policy Statement in November that there would be no cuts to their official cash interest rate until 2025 and there could even be another rise in 2024. At present, the New Zealand financial markets don’t believe the Reserve Bank. The market is edging medium and long-term interest rates down. They are paying more attention to what the US Federal Reserve is saying. The Fed recently changed its tone and it is now very different to the Reserve Bank. They said that their official interest rate could fall by 75 basis points next year – and I emphasise next year.

The new Government has already changed the Reserve Bank’s policy mandate back to a single target of price stability. The quantitative target is still the same, to have the Consumers Price Index between one and three per cent over the medium-term. But the Reserve Bank no longer needs to also target a ‘sustainable level of unemployment’. This could, and should, mean it will wait a little longer to see more evidence that inflation is fading in New Zealand before reducing their cash rate. But the Reserve Bank has said frequently over the last two years that their past decisions would not have been different even if they had had a single mandate of price stability. I will be interested to see if they continue to say that now that they do have a single target.

The Reserve Bank’s next Monetary Policy Statement doesn’t come out until February 28. That’s a long time to wait with the economy and inflation at a turning point. The economy doesn’t stop in January and I don’t know why the Reserve Bank delays its decision-making for such a long period. They are going to have to say or do something before then or interest rate policy will be totally taken over by the financial markets.

We now get selected monthly price data from Statistics New Zealand. The recent November data showed some prices, such as food and petrol, continuing to fall. We will get another set of this monthly price data around January 13 and a full figure for the CPI in the December quarter on January 27.  We will know by then what is likely to happen to inflation and interest rates in New Zealand in 2024. The market won’t wait until the end of February.



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