Editorial: Reserve Bank faces challenging year as public trust in central banks wanes

Reserve Bank governor Adrian Orr faces tough task regarding knowing when to cut interest rates, and by how much. Photo / Mark Mitchell

OPINION

A month into the new year, there’s reason to have a glass-half-full view of life in New Zealand.

The sun and a scattering of public holidays have been great.

The inflation rate is also tracking in the right direction, falling to 4.7 per cent, as the economy is slowly getting back to equilibrium.

Of course, getting to this point continues to come at a cost.

Prices are still rising from elevated levels. Putting food on the table and paying rent are struggles for many.

Those with a lot of debt, including recent first-home buyers, are seeing their hard-earned cash eaten up by interest.

Some businesses are struggling to secure sales. Their margins are being squeezed and they’re having to let go of staff.

Most people are taking a hit to get the economy back to a more balanced position.

It really has been a hell of a few years, so perhaps a glimmer of hope that things are normalising since the Covid crisis is enough to give one a sunnier disposition.

One can only nervously hope the Reserve Bank (RBNZ), and the community of central banks around the world it’s part of, don’t stuff things up.

Central banks put the pedal to the metal, slashing interest rates (too much, as it turned out) in the face of Covid. They then hit the brakes hard to try to curb inflation.

The next part of their drive is the real challenge. When do they turn their engines on again and cut interest rates, and how fast do they go?

How excited will the markets, whooping and hollering from the sidelines, get once central banks indicate they’re about to move?

Getting this manoeuvre right will arguably be more difficult than the “cut aggressively, hike aggressively” approach central banks have taken of late.

The RBNZ needs to pay close attention to what’s happening in the New Zealand economy, which is particularly sensitive to interest rate changes and less flexible than the likes of the US economy.

It needs to figure out the net effect on inflation of high immigration (which could stay at record levels, fall a bit, or fall a lot). Sure, people are filling skill shortages, but they’re also adding to demand, putting pressure on the likes of the housing market.

The RBNZ also needs to grapple with how a more hostile world facing war, political division and climate change will structurally impact prices. Indeed, insurers’ risk radars are flashing red, as they’re only sending premiums in one direction - up.

The RBNZ wouldn’t want to cut interest rates before inflation was dead, only to have a hike again. Conversely, it wouldn’t want to obliterate the economy in its quest to be extra sure it got the job done.

Central banks haven’t exactly showered themselves in glory over the past few years.

Public confidence in the policymakers that heavily influence the economy is low.

Central banks need to work hard to regain people’s trust.

Well-functioning democracies and economies ultimately hinge on people having confidence in the political and financial systems that affect their lives.

Our best wishes are with the RBNZ. Please get things right in 2024.