The Government’s re-election is in the Reserve Bank’s hands now

The Reserve Bank yesterday assumed the lead role in the New Zealand economic recovery.

With the Government constrained what it can do with fiscal deficits out to at least 2028, it is now up to the Bank to provide stimulation to keep the economy ticking over.

Importantly, for National’s political fortunes, it will need to keep repeating what it did yesterday and continue to lower interest rates.

The Prime Minister was yesterday quick to boast that it was his Government that had made the decision to lower the Official Cash Rate by .25 per cent possible.

 “Our work on spending is directly contributing to lowering inflation, which then is obviously the precursor to lowering interest rates and getting the economy growing and moving again,” he said, responding to the Reserve Bank’s news.The reaction from Acting Reserve Bank Governor Christian Hawkesby was a little more nuanced.

We were delighted that the Government announced its Budget before we met as a monetary policy committee, and that meant that we had all that information in front of us, and we could take that as given,” he said.

“It had a very little role to play in terms of the decision we made today relative to previously.”

Hawkesby’s description of the impact of the Budget sounded like a mixed bag; there was the stimulatory effect of the investment boost scheme, providing some support set against what he called some active decisions around reducing government expenditure.

“They effectively net out, and it remains the same story that government spending as a portion of potential output is looking to be falling through our projection period,” he said.

Thus, the Bank — and the Government — will now largely be at the mercy of both the domestic and global forces that will drive inflation over the next 12 months.

Untangling those forces will not be easy.

Hovering over everything is the uncertainty provoked by President Trump’s erratic “on again, off again” tariff policies.

The Bank has produced two scenarios about what could happen.

In the first scenario, more significant increases in overseas production costs would result in higher imported inflationary pressure.

This would keep the Official Cash Rate higher.

In the second scenario, a weaker global economy would contribute to weaker demand for our exports and lower imported inflation.

This scenario would see the OCR lower.

The Bank concedes that these are not the only possibilities, and the Monetary Policy Statement says that from now it will be particularly looking at:

But the global uncertainty will hit the New Zealand economy in other ways.

“We assume that business investment declines over the first half of 2025, reflecting high global economic uncertainty and material spare capacity in the economy,” the Statement said.

Overall, the Bank’s forecasts for next year are slightly more optimistic than those presented by Treasury for the Budget last week.

The biggest difference is in the unemployment forecast, which the Bank is picking will be 5.0 per cent against Treasury’s 5.4 per cent.

Otherwise, both see growth of around 2.8 – 2.9 per cent, and the Bank is more optimistic that inflation is falling, which it predicts will be 1.9 per cent against Treasury’s 2.1 per cent.

There was an interesting observation in the minutes of the Bank’s Monetary Policy Committee minutes, which said some members had observed that non-tradable inflation as being boosted by administered prices.

That means government, central and local pricing.

That particularly means rates increases like Wellington (16.9% increase) or Tauranga (also 16%).

The rates explosion clearly worries Finance Minister Nicola Willis.

“ As a Wellingtonian, I can be really clear that there are a lot of very frustrated ratepayers in this city who have watched their council prioritize the wrong projects, and they share those concerns with me readily,” she said yesterday at her press conference with the Prime Minister called to discuss the Reserve Banks actions.

Otherwise, Willis was happy with what the Bank had decided.

The decision to lower the Official Cash rate was good news, she said.

“The Reserve Bank forecasts that from June around half of the existing mortgages will be refixing, so what that means is that many New Zealanders over the next few months are going to feel lower interest rates in their bank accounts, in their household budgets, and that’s good news obviously for them, but it’s also really good news for our local businesses because when people have more money in the household budget, they’re more likely to spend at local shops, local cafes, and we look forward to that helping the economic recovery on its way,” she said.

Hawkesby was broadly in agreement.

“There are parts of the economy that are doing it tough at the moment, there are parts that are struggling, but there are other sectors that are doing well,” he said.

“High agricultural export prices are supporting that part of the economy and the economy more broadly.

“We also highlight that we have lowered interest rates a considerable way over a reasonably short length of time, and that is still, that is going to support the economy and still working its way through.”

And the Acting Governor couldn’t stop himself expressing unheard of emotions at the Bank when he sounded both passionate and excited about doing the Governor’s job.

“The great thing about monetary policy is that you get to all get together every six weeks and see what’s happened in the meantime and work through and revisit your judgments and assumptions,” he said.

“We’ll be back.”