Announcing on February 12, 2024 that the inflation problem is still not over, Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr cited broad financial pressures as the reason for maintaining a “restrictive monetary policy” position. Orr stated before the parliamentary committee that the current inflation rate of 4.7% was still too high and the committee’s aim was to slow it down to around 2%.[1]
“That is why we have maintained a restrictive monetary policy stance, keeping the official cash rate at 5.5%, and will reiterate our views on this at the end of this month,” Orr told MPs. Inflation has trended downward since the bank’s last interest rate decision, but following the release of unexpectedly strong local employment data, the market has reduced near-term rate cut expectations.[2]
The Central Bank, which rejected interest rate cuts before 2025, became one of the first central banks to eliminate monetary incentives during the pandemic period and has increased interest rates by 525 basis points since October 2021 to restrain inflation. Although the inflation rate is below historical peaks, it is well above the Central Bank target band of 1% to 3%.[3]
Deputy Chairman Christian Hawkesby told the committee that the financial system remains strong and consumers are in a good position to tolerate higher interest rates. Hawkesby also stated that although three months had passed since the bank’s last financial stability report, the information in it was still sufficient. “The vast majority of households continued to manage their debt and service their mortgages, but some are struggling and falling behind,” he said.[4]
House prices have stabilized in the last six months. However, central bankers have said they are concerned that housing construction is slowing down at a time when the population is increasing due to high immigration. It can be said that this situation reflects the Central Bank’s determination to continue to follow a strict policy in the fight against inflation. Adrian Orr’s statements show that inflation still needs to be brought under control, and it is important to maintain the current policy stance to achieve this goal. This includes the Central Bank’s commitment to ensuring price stability and the message that inflation will not be allowed to rise beyond the targeted range.
The Central Bank’s decisions to increase interest rates can be seen as an effort to reduce inflation pressure. However, by increasing interest rates, other economic indicators such as economic growth and consumer spending may also be affected. In this case, the Central Bank needs to take into account the balance between policy decisions and other important economic indicators such as economic growth and unemployment.
On the other hand, increasing interest rates could increase credit costs and affect indebted households. Therefore, it is important for the Central Bank to address the financial situation of households in a balanced manner with its policy decisions.
In addition, the stability in house prices mentioned in the report shows that developments in the housing market should also be monitored. High immigration and housing supply constraints could impact house prices, posing a risk to economic stability. Therefore, the Central Bank must also take into account the situation of the housing market in its policy decisions.
In this context, the Central Bank may receive a reaction from the public and subsequently increase criticism against the government. Even though the Central Bank blames inflation, it is a question mark how convincing or responsive this will be to the public. As a matter of fact, in countries dealing with problems such as inflation, central banks can become the target of the public.
Moreover, the Central Bank’s assertion of inflation may cause tension between the government and the central bank. In this way, it can be argued that the central bank targets the economic policies of the government. At the same time, tension between the central bank and the government could worsen inflation and the government’s monetary policies. The situation in question may also cause the economy to deteriorate and public reaction to increase.
In addition to all these, in a possible crisis between the government and the central bank, the country’s institutions may be divided into two. This situation may slow down or even hinder New Zealand’s foreign policy production process in a region such as Asia-Pacific, where security equations are fragile and regional tensions are high. It can be said that this may bring about the strengthening of anti-government ideas.
As a result, it is important that the Central Bank continues to follow a strict policy in the fight against inflation. However, this policy will have effects on economic growth and other important economic indicators. Additionally, financial stability and housing market developments can also be included in policy decisions. In this way, the Central Bank can maintain economic stability while achieving its inflation targets.
[1] “New Zealand Central Bank Blames Inflation for Restrictive Policy”, Reuters, https://www.reuters.com/business/finance/new-zealand-central-bank-blames-inflation-restrictive-policy-2024-02-12/, (Date of Access: 12.02.2024).
[2] “New Zealand Central Bank Blames Inflation for Restrictive Policy”, US News, https://money.usnews.com/investing/news/articles/2024-02-11/new-zealand-central-bank-blames-inflation-for-restrictive-policy, (Date of Access: 12.02.2024).
[3] “Central Banks to Blame for Inflation, Former RBNZ Chief Says”, Bloomberg, https://t.ly/P6NTR, (Erişim Tarihi: 12.02.2024).
[4] “New Zealand Central Bank Blames Inflation for Restrictive Policy”, Reuters, https://www.reuters.com/business/finance/new-zealand-central-bank-blames-inflation-restrictive-policy-2024-02-12/, (Date of Access: 12.02.2024).
