Analysis | When we know if rates are really approaching their peak

Remark

Here’s a central bank that has embraced the idea of a recession rather than tiptoeing around the subject. Officials are proclaiming that aggressive rate hikes are holding back the economy. Inflation remains far too high for comfort and talk of a smooth pivot borders on incitement. We’re talking about the Reserve Bank of New Zealand, a proud early mover in the fight against price hikes – and one that may soon undergo its own form of recalibration.

The transition that has been underway in parts of the world for some time is likely to become a reality in New Zealand this month. Just don’t expect it to sound like a big shift. The pullback is unlikely to result in something as modest as the Federal Reserve’s quarter-point increase last week. Economists have been busy revising their forecasts, and at least some are now expecting a half percentage point increase in key Kiwi rates on February 22. against, the RBNZ will pepper the decision with protests that it is not the end of the walks. Their attitude will be restrictive for some time to come – mission not accomplished and so on.

Don’t let that obscure what’s happening. Once the boom is lowered from the record 75 basis point increase undertaken in November, it will be difficult for Governor Adrian Orr to move back up for lack of anything truly scenario-shattering. More likely is an indication that a break is on the horizon, although the bank may not want it described as such. Not because there’s no breathing space, but because the bank doesn’t want a “cut” story shaping the thinking of businesses and consumers, let alone investors. JPMorgan Chase & Co. predicts an increase of half a percentage point and then an extended sabbatical. “We are approaching the end of the walking cycle,” Tom Kennedy, an economist with the company, wrote in a recent note.

There are good reasons for New Zealand to reverse the hawkishness, essentially if not rhetorically. Although inflation is high, it lags behind the central bank’s pessimistic projections. Consumer prices rose 7.2% in the fourth quarter from a year earlier, less than the 7.5% Orr’s team had expected. The labor market is very tight, although the grip is loosening a bit: the unemployment rate is rising to 3.4%, slightly more than analysts had expected. Still low? Yes, but with a recession on the horizon, it’s hard to see the job scene improving from here.

And about that decline? Yes, it’s something Orr desires. When asked at a parliamentary committee hearing late last year whether his aim was to trigger a recession, the governor replied: “Yes, that’s right. We are deliberately trying to slow down overall spending in the economy.” Give him points for candor. It’s hard to see Fed boss Jerome Powell face a Senate panel with the same candor. Usually, Fed folks respond to questions about a slump with something along the lines of “it’s not in our forecast” or “there’s a narrow path to a soft landing.”

The problem with leaning into, or even bragging about, a recession is that at some point the pain starts to register. While most central banks are independent of government, like New Zealand’s, the environment in which they operate is political and decisions can have electoral consequences. Legislators worried about holding on to their seats can easily challenge policymakers: OK, so now you have your recession, what do you do about it? In an environment where inflation has been seen as the greater initial evil, as has been the case since 2021, bankers tend to say that the best way to encourage long-term sustainable growth is to promote price stability.

The good news is that inflation is falling in many major economies and there appears to be little appetite for raising borrowing costs to levels approaching those of the Paul Volcker era – despite all the comparisons to the iconic former Fed. chairman who were popular last year. The Fed’s reference rate in 1980 was 20%. It is now between 4.5% and 4.75%. The greenback is pulling back against many currencies, mainly due to expectations that the Fed is nearing completion of its tightening campaign. The NZ dollar is up about 6% over the past three months.

Despite the small economy and remote location, watch how policy develops in New Zealand. The country likes to be first in class. The RBNZ pioneered inflation targeting, setting a target of around 2% three decades ago, a target that has become widespread. Kiwis don’t mind emphasizing that they are often among the first movers when prices start to take off, as in 2021.

If there’s even a hint of anything less than tough love this month, we’ll know we’re in a new place — no matter how much policymakers protest.

Analysis | When we know if rates are really approaching their peak

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