The new Reserve Bank Governor is emerging as a monetary policy purist.
At a media briefing yesterday, she constantly repeated her definition of the Bank’s job.
It was, she said, to be laser-focused on inflation.
Across the road in the Beehive, recent events may mean that the message might cause a certain nervousness.
Of course, Dr Anna Breman is right to say that it is the Bank’s role.
It is a message the Bank has been trying to get across since its dual mandate to control not just inflation, but at the same time ensure maximum sustainable employment was ended in December 2023.
But it is not necessarily one that is understood in the Beehive.
Take, for example, the Prime Minister being interviewed by Newstalk ZB’s Mike Hosking back in August.
Hosking argued that acting Reserve Bank Governor Christian Hawkesby was “not doing his job” because by not dropping interest rates by 50 rather than 25 basis points, he had allowed the economy to stall.
“You must be tempted to say what he really should have done is 50 when he didn’t do a damn thing, when he missed the whole economy going backwards, and that was his job then, and he’s not doing his job properly,” said Hosking.
Luxon’s reply: “Yeah, well, I meet with him once before any of those sort of announcements happen, and I can often give my views in that case, but that’s me giving my reckons and my perspective,” he said.
Luxon went on to reveal that those views included a belief that the Bank should have also dropped rates by 50 basis points in May.
On the same day, Finance Minister Nicola Willis celebrated the 25 basis points drop, but again, it was the impact on growth that she was focused on.
“People have been calling for more stimulus in the economy. This is more stimulus,” she said.
But Breman yesterday was insistent that the Bank’s Monetary Policy would be directed only at inflation.
“We will maintain a laser focus on our core mandate, that is, low and stable inflation,” she said.
And it was clear she saw growth as a (welcome) by-product of low and stable inflation.
“Economic growth is important for inflationary development,” she said.
“You want an economy that has low and stable inflation because it helps to foster prosperity for all New Zealanders.
“So growth is really interesting. It doesn’t mean that growth is not important, it’s just that our tools are set up to focus on low and stable inflation, which will promote growth.”
And so her emphasis will be on the mandate.
“I think I’m putting an emphasis on the mandate because I think it’s important that everyone understands the role of the Reserve Bank in the New Zealand economy,” she said.
“I think I’m simply doing it to stress where our focus will be.
“We’ve seen over the past few years how hurtful high inflation is, how much it harms households and businesses, and it erodes purchasing power.
“Volatile inflation is very complicated for small businesses to handle as well.
“So, I’m focusing on that because this is what we are expecting to achieve; inflation within the target range, focusing on the midpoint.”
But the very recovery that the Government is now highlighting and which is expected to continue into next year carries within it the seeds, not of Reserve Bank Official Cash Rate decreases but rather, increases.
And whilst the overall economy may be able to carry on regardless if interest rates start to creep up, homeowners with mortgages will not be so sanguine.
And those homeowners and their mortgages are the subject of almost every speech Luxon gives.
His speech marking two years in Government to a National Party Christmas function a fortnight ago in Upper Hutt was typical.
“Interest rates have been cut eight times,” he said.
“The result is that someone refixing an average mortgage today could expect to save around $10,000 a year, compared to the end of 2023.”
The only problem with this is that the Reserve Bank qualified its Official Cash Rate forecasts in its latest Monetary Policy Statement published last week.
The Monetary Policy Committee saw risks that price-setting behaviour by businesses might become more sensitive to upside inflation surprises, given recent high inflation and inflation expectations remaining above its 0-3 per cent target midpoint.
“Spare capacity in the economy has reduced business profit margins, and some restoration in margins is expected as demand improves,” the Committee said.
“This restoration in margins could occur more rapidly than anticipated, which would pose an upside inflation risk.”
The Westpac economics team responded to this with a commentary which said that prior to the November Monetary Policy Statement, markets were pricing in some chance of the OCR falling to 2% by the middle of 2026 and then a very gradual rising trend after that.
This would have meant the OCR would remain below 2.5% until mid-2027.
“However, with the RBNZ signalling that the hurdle for further rate cuts is high, market pricing has swung around sharply,” the report said.
“At the time of writing, only three basis points of easing was priced in over the coming months.
“And looking further ahead, a hike in the OCR to 2.50% is fully priced in by the end of 2026, with several further increases expected over 2027.
“Since the RBNZ meeting, benchmark wholesale interest rate swap rates have increased by 15-30 basis points, with longer maturity rates rising by more than shorter maturities.”
And the consequence of that was that on Monday, Westpac announced it was increasing rates on two to five-year loans by 0.3 per cent.
That is not much; probably only around $100 a month for an average $588,000 mortgage. But it will be enough to upset National’s electoral arithmetic.
A significant chunk of mortgages is set to refix in 2026, with estimates suggesting around $160 billion in loans, roughly 40% of all home loans, rolling over in the latter half of that year, creating a critical period for borrowers facing potentially higher rates than their previous fixed terms.
The Prime Minister may want to give Breman his views on what it should do in the light of this.
But given her firm responses yesterday about her single mandate, she sounds unlikely to bend in the political wind.
