https://www.bloomberg.com/opinion/articles/2024-04-16/new-zealand-recession-is-the-price-of-an-inflation-stalwart?srnd=opinion

Give New Zealand a bit of credit. The nation's economy is small, but often punches well above its weight in monetary policy. First in the world to adopt a formal inflation target, the central bank doesn't do a lot of nuance. Officials also aren’t averse to standing on their own. That's just as well because they are pretty isolated at the moment.

While the US economy shows great resilience and chances of a global downturn recede, the Kiwis are in the midst of a rare double-dip recession.Recent reports have also revealed sluggish consumer spending, a pronounced slide in manufacturing, and bleak business confidence. The Reserve Bank of New Zealand itself describes the economy as "weak."


The country stands out in another critical way: The RBNZ really doesn't want to talk much about reducing interest rates. Federal Reserve officials have been discussing the prospect of some easing in coming months. The European Central Bank has suggested the first reduction will come in June, and the Bank of England is also laying the groundwork for a cut. Several Asian central banks have indicated that once the Fed shifts, they are inclined to follow. None of these economies hasturned in a performance as disappointing as New Zealand's.

Are the country's monetaryguardians too stubborn? Adrian Orr, the central bank chief, has argued that with inflation above the target range of 1%-3%, and unlikely to return to that cherished zone soon, a restrictive stance is the way to go. Orr warned repeatedly that choking off inflation would require pain, quite possibly a recession. What he said was what you got. Orr deserves points for candor.

High Price for Inflation Victory

New Zealand has endured a series of moderate contractions

Source: Statistics New Zealand
Some economists doubt that with growth suffering and inflation retreating, the bank will hold off for very long. "We have not been expecting gradualism from the RBNZ," Ben Jarman at JPMorgan Chase & Co. wrote in an April 10 note that forecast a cut in August. "A sharp pivot is more likely on the basis of historical behavior and the RBNZ's chosen ‘white heron’ metaphor for late but decisive action."

The white heron line is a local take on the classic hawk versus dove monetary divide that clutters discussion of the global picture. The former are often characterized as favoring tight money — or, at least, an aversion to cuts — and the latter inclined to a more relaxed approach. New Zealand’s avian analogy is that when you are ready to adjust rates, do so quickly, without ambiguity, and don't get trapped in half-measures. By this line of reasoning, there is little point in talking much about rate cuts until you are ready to strike. The good folks in Wellington are probably rolling their eyes at the verbal challenge that the Fed has walked into: Chair Jerome Powell began flagging eventual cuts late last year after great progress in reducing inflation, though recent reports suggest the US economy is re-accelerating, and traders are betting on fewer reductions. Some even suggest they won't come at all. That would be quite the climb down from the Fed.

All this consistency in Wellington is producing some worthy progress on inflation. The bank predicted in February that the pace of consumer price increases will drop below 3% in the third quarter. In theory, that might allow for some much-needed rate cuts around the end of the year. But don't count on it. New Zealand loves the place in history that it earned through early adoption of a written inflation objective. That also requires some meaningful adherence to the spirit of that mandate, thoughthe precise wording of the bank's remit has become a bit squishier in the intervening decades. Unfortunately, growth has to suffer in the process.

Get the India Edition newsletter.

Menaka Doshi's insider's guide to the emerging economic powerhouse, delivered weekly.

By submitting, I agree to the Privacy Policy and Terms of Service, and to receive offers and promotions from Bloomberg.
It's too bad monetary policy has to be such a roller-coaster ride. While targets assigned to independent central banks have generally produced superior results, the success is relative and comes with caveats. Discretion, the ability to feel a shift in the economy and react preemptively is constrained. Alan Greenspan, the former Fed chair, was skeptical about enshrining numerical goals for precisely this reason.

Not that the performance of every economy has been superb. Germany, the heart of the euro zone, is limping. The UK suffered a shallow recession last year and is now growing again, even if slowly. In these cases, however, the central banks have made clear they are attentive and prepared to ride to the rescue. New Zealand has chosen to be exceptional in its prosecution.

Through the 1990s and early 2000s, as inflation targeting spread around the world, the RBNZ was often the reference point — if not the gold standard. Central banks were in awe ofsteps taken in a corner of the South Pacific. That was a relatively benign economic era. Too little attention was paid to the potential downside. New Zealanders are feeling it now.

Download PDF