Central banks are in a global race to get inflation under control. The Reserve Bank of NZ was first to hike amid Covid, but it may be the last to cut.
Video / NZ Herald / Carson Bluck / Getty
The Reserve Bank of New Zealand was one of the first central banks to hike interest rates when pandemic-fuelled inflation spiralled out of control, but it may be one of the last to cut rates.
Our annual inflation rate sits at 4.7 per cent - higher than Australia’s 4.1 per cent, the United Kingdom’s 4 per cent, the United States’ 3 per cent, Canada’s 2.9 per cent and Europe’s fresh 2.8 per cent.
Effectively, we’re losing the inflation-reversing race.
“The United States will probably start cutting rates later this year. The European Central Bank will probably follow suit,” New York-based Aurora Macro Strategies chief economist Dimitris Valatsas told Markets with Madison while he was in Auckland this month.
“I‘m sure the Reserve Bank of New Zealand won’t be too late to follow.”
“I think with the exception of the Bank of Japan, which has followed its own path throughout this whole rate cycle, most banks will be heading downwards.”
However, the pace and scale at which each of these economies start to see rates fall will diverge - compared to the almost unison effort of rate hikes we saw in the past couple of years.
“There is a global rate cycle going on in monetary policy. [It] has been pretty coordinated around the world during this latest inflationary wave.
“[But,] it’s not clear that all central banks will end at the same place or go back to where they began.”
Put it in your diary - this Wednesday is the RBNZ's first rate call of the year. Will Governor Adrian Orr and his committee decide to hike, hold or cut? Photo / Mark Mitchell
It’s not just rates from here that may differ; Valatsas noticed other marked differences between the RBNZ and the US Federal Reserve.
“What I found interesting from my visit here is how politicised monetary policy has become, in a way that it has threatened to become in the United States but hasn’t become yet,” he said.
Valatsas, an adviser to hedge funds, was surprised the RBNZ’s mandate had returned to focus solely on inflation under the current Government, from a previously dual mandate including achieving maximum sustainable employment.
“The main issue with a single mandate is that the bank doesn’t have the flexibility to adapt to economic conditions.
“It is likely that New Zealand will find itself in a situation where monetary policy will need to stimulate growth, but, not have the mandate to do so.”
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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.
Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.
