Reserve Bank won’t over react to trade war, says chief economist Paul Conway, as the bank launches a GDP tracker

Reserve Bank chief economist Paul Conway unveils new RBNZ tool "Kiwi-GDP", that tracks economic growth almost in real time. Photo / Mark Mitchell

The Reserve Bank of New Zealand (RBNZ) continues to believe tariffs could hamper economic growth, and therefore see interest rates fall further.

However, the central bank is wary of over-reacting to economic shocks, including the trade war under way.

This was a message RBNZ chief economist Paul Conway conveyed in a speech on Tuesday morning.

“Cool heads, steady hand on the tiller, all that kind of stuff. That’s very much the vibe around the MPC [Monetary Policy Committee] table currently,” Conway said.

The RBNZ cut the official cash rate (OCR) by an expected 25 points, to 3.5%, last Wednesday. It decided not to cut the rate by more in response to the United States unveiling plans to impose larger and more widespread tariffs than expected by many.

Less than 24 hours after the RBNZ made its announcement, the US backtracked on some of its plans. It’s since made further concessions – causing extreme levels of uncertainty, which are expected to stymie investment and economic growth globally.

While Conway said the RBNZ wouldn’t over-react, he reiterated what it said when it reviewed the OCR last week, that “higher tariffs and uncertainty about global trade policy mean economic activity globally and in New Zealand will most likely be weaker than expected”.

“At this stage, the likely impacts on inflation in New Zealand are more ambiguous, but the balance of risks has shifted to the downside.”

Conway noted the RBNZ had scope to lower the OCR further, “as appropriate, once the impacts of changes in global trade policies on medium-term inflation pressures in New Zealand become clearer”.

It is next due to review the OCR, and release a fulsome statement and updated forecasts, on May 28 – nearly a week after the Government releases its Budget.

Finance Minister Nicola Willis last week suggested she wouldn’t be less frugal than signalled to soften the blow of a potential economic slowdown.

This approach aligned with the view of the Treasury, which said, in its draft Long-Term Insights Briefing, that cutting the OCR was typically a more reliable way of smoothing the effects of a downturn than upping government spending.

The RBNZ’s latest forecasts, released in February, were for the OCR to be cut to around 3.1%.

While Conway said the RBNZ wouldn’t over-react to world events, the bank’s comments suggest the OCR could go lower, to a stimulatory level.

RBNZ launches GDP tracker

Separately, Conway unveiled a new RBNZ tool, “Kiwi-GDP”, that estimates how much activity there is in the economy – almost in real time.

The tool uses a broad range of economic indicators as they are released to estimate how much gross domestic product (GDP) growth there is the current quarter.

The RBNZ will update the chart on its website every Friday, showing how new information has adjusted its view of activity in the economy.

As at last Friday, Kiwi-GDP projected GDP rose by 0.8% between the December and March quarters.

The official March quarter GDP numbers will only be known on June 19, once they’re published by Statistics New Zealand.

Conway likened Kiwi-GDP to a model used by the Federal Reserve of New York.

He said the Kiwi-GDP was “model-supported, not model-driven”.

“While sophisticated statistical techniques form the backbone of our approach, experienced economists play a vital role in creating our nowcasts. Our economists draw on their knowledge of the models’ limitations and a wealth of off-model data, research and industry insights to improve nowcasting results.”

Massey University and Westpac are among those that publish live GDP trackers.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.