Venu Menon
Wellington, November 30,2023
With Reserve Bank Governor Adrian Orr holding off an interest rate hike for the present but warning of one in the foreseeable future, the new government is scrambling to introduce its first bill in the 54th Parliament, which officially opens next week.
“The first bill that we will introduce and move through all stages is to return the Reserve Bank of New Zealand to a single mandate, a single focus on fighting inflation,” said National’s Chris Bishop, newly-appointed Leader of the House, who accompanied Prime Minister Christopher Luxon at his first post-Cabinet press briefing in Wellington on Wednesday.
Predictably, the Reserve Bank governor’s hawkish stand on interest rates provided Luxon with the context to blame the “abysmal economic management of the last Labour government,” which he characterised as “economic vandalism on a scale that we have not seen before.”
Common goal
Nevertheless, Prime Minister Luxon and Reserve Bank Governor Orr are “united on a goal of going after inflation.”
Since 2018, the RBNZ has pursued a dual monetary policy mandate of promoting price stability while also boosting the unemployment rate.
But by keeping interest rates “on hold” and warning of a hike down the line, RBNZ Governor Orr has put the new government under pressure to align its fiscal projections with the Bank’s monetary policy.
This means the government’s HYEFU (half-year economic and fiscal update) needs to align its projections with the RBNZ’s forecasts. And the two need to conjoin before Parliament breaks for Christmas.
Economic data
Recent economic data appears to back the RBNZ. Annual inflation as per the Consumer Price Index (CPI) is pegged at 5.6%, down from 6.0% in June 2023 and 7.35 % in June 2022. Unemployment stands at 3.9%, up from 3.6% in June and 3.2% in September 2022.
But while inflation is on the decline, the new government wants the RBNZ to bring it within the target range of 3%. It also wants to set timeframes for achieving that goal.
Immigration
But lowering interest rates in the future is uncertain. High net immigration and the resultant upward pressure on housing, and downward pressure on wages, will likely let loose inflationary trends in the economy.
Backdrop
This is the backdrop behind the new government’s urgency to legislate a change of remit for the RBNZ.
It also spurred the meeting between Prime Minister Luxon, Finance Minister Nicola Willis, and RBNZ Governor Orr on Tuesday.
“In my conversations yesterday with the Reserve Bank Governor, I was pleased to hear his obsession and his focus around driving inflation lower,” Luxon told reporters.
It was no coincidence that the Secretary of the Treasury was also present at that meeting. It helped “make sure that we’re getting the fiscal and monetary policy joined up, and not working at cross purposes, which is what we’ve observed over the last few years,” Luxon noted, taking a dig at the previous Labour government.
Past criticism
If an interest rate hike has been put on hold, so have memories of the criticism directed at RBNZ Governor Orr by Luxon and Willis while they were in the Opposition. Taming inflation is now a common cause for old adversaries.
Runaway spending
RBNZ’s Monetary Policy Statement has traced the higher interest rate path partly to higher-than-expected government spending.
“But the bigger driver of it [interest rate hike] is actually the total level of spending in the economy, and that is largely driven by the growth in the population,” Orr noted.
Downsizing
One change proposed in the Coalition Agreements is the downsizing of the RBNZ’s seven-member Monetary Policy Committee. But that is in the future and is not included in the bill the government is introducing in Parliament next week.
Venu Menon is an Indian Newslink reporter based in Wellington
