Why Nicola Willis’ commitment to tight spending means the Reserve Bank will stay in the spotlight

Reserve Bank Governor Christian Hawkesby is staying the course by cutting the OCR by 25, rather than 50 basis points. Photo / Mark Mitchell

KEY FACTS:

• The RBNZ cut the OCR by 25 points to 3.5% on Wednesday.
• US President Donald Trump is temporarily backtracking on his tariff plans.
• Finance Minister Nicola Willis is pledging to stick to the spending limits she outlined late last year.

Just as we thought things at the Reserve Bank of New Zealand (RBNZ) were about to get boring, monetary policy is being thrust back into the spotlight.

United States President Donald Trump’s original decision to impose more widespread tariffs than expected is set to dampen economic growth here and abroad.

While tariffs disrupt global supply chains, making trade more expensive, economists believe they won’t prevent the RBNZ from cutting the Official Cash Rate (OCR) from a contractionary level to a neutral level.

In fact, they believe Trump’s more-outlandish-than-expected tariffs could weigh so heavily on the economy that the RBNZ has to take the OCR well into stimulatory territory.

The majority of the RBNZ’s Monetary Policy Committee believes there’s a risk of inflation being lower, and the OCR needing to go below what it envisaged when it last reviewed the OCR in February.

In February, the committee was upbeat. Inflation was back in its box, and there was hope the economy was recovering – albeit slowly.

At the time, the RBNZ saw the OCR being cut by 25 points on two or three more occasions to a broadly neutral rate of 3.1%.

It saw a return to business as usual, with a period of keeping the OCR steady on the horizon.

By April, there was some talk the committee could cut the OCR by 50 points in response to Trump’s tariffs.

But the committee played it safe, cutting the OCR by an expected 25 points (to 3.5%) on Wednesday, and including some dovish comments in its meeting minutes.

A 50-point cut would’ve been risky. Given the committee wasn’t scheduled to deliver a fulsome monetary policy statement, it wouldn’t have had the forum to explain the move.

Furthermore, it would’ve wanted to signal stability and continuity following Adrian Orr’s unexplained resignation as governor last month – a day before the RBNZ hosted a big international conference.

While markets melted down following Trump’s tariff announcements, with investors losing trillions worldwide, the RBNZ suggested it was looking through this for now.

Both it and Finance Minister Nicola Willis expressed confidence in the functioning of financial markets.

But a lot can change – fast.

Indeed, less than 24 hours after the RBNZ released its statement, the US bond market went haywire, and Trump announced he would hike tariffs imposed on Chinese imports into the US to 125% and keep the rate at 10% for 90 days for 75 countries.

While equity prices have jumped, there had been isolated talk the RBNZ might have to cut the OCR before its next review on May 28.

An emergency rate cut would be a huge deal, and most certainly put the RBNZ back in the spotlight.

The more likely factor that will keep monetary policy centre stage is Willis saying she won’t open the Government’s purse to stimulate the economy.

“This is not a time to dramatically change direction. It is a time to stay the course,” she said on Tuesday.

Willis has also repeatedly underlined her commitment to sticking to her tight operating allowance.

If there ends up being less economic growth than expected, the Government would receive less tax revenue, which means it would have to cut spending by more to stick to its spending promises.

While it can continue deregulating parts of the economy to support efficiency, it’s poised to look at the RBNZ to really stimulate growth.

In other words, if Trump keeps forging ahead with restrictive tariffs, or keeps flip-flopping in a way that stymies investment, and global growth takes a massive knock, the RBNZ might cut the OCR by more than would be the case if New Zealand had a less thrifty government.

Memories of the Labour-led Government’s pandemic response are still fresh in our minds.

It came out on day dot, stressing the fact the Government’s big balance sheet would be used to support the economy.

But things are different this time around.

Firstly, the nature of the shock is completely different – the world hasn’t come to a standstill as people stay home to avoid catching a virus.

Secondly, there is more room to cut the OCR to stimulate the economy than there was in early-2020, when the OCR was at 1% and monetary policy really did need mates.

Thirdly, there is less capacity and public appetite for the Government to borrow and spend than there was in 2020, when government debt was worth about 20%, rather than 40%, of gross domestic product (GDP).

So, there is every chance the RBNZ will remain a very active player in the economy.

Christian Hawkesby’s appointment as governor for the next six months might not herald a more boring era of central banking than when Orr was at the helm of the RBNZ.

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.