MNI INTERVIEW: Market Overestimating RBNZ Hikes - Ex Econ

The Reserve Bank of New Zealand is likely to wait until its September or October meeting before raising the Official Cash Rate from 2.25%, unless the Middle East conflict worsens and significantly impacts global growth, a former staffer told MNI, adding that the Bank’s next steps will hinge on the severity of the shock and how the government responds.

“The market here is, to some extent, pricing as if New Zealand is in the same position as Australia, and I think that’s wrong,” said Michael Reddell, an independent commentator and former RBNZ special adviser.

The markets have priced in a 3% OCR by October, with a 68% chance of a hike at the July 8 meeting, and a 37% risk of a move at the next May 27 decision.

“We’re starting from a situation where a substantial negative output gap should buy the Bank a significant amount of time," he said. 

While Governor Anna Breman's recent comments that core inflation would remain comfortably low were unconvincing, rates would likely hold until at least late 2026. 

Reddell, also a board member for the Bank of Papua New Guinea, argued the RBNZ could also wait until after the Nov 7 elections to increase rates. "It’s not impossible that it doesn’t move at all this year, simply because it’s hard to tell what the situation will look like.”

GOVERNMENT RESPONSE 

Reddell said a severe oil shock could prompt significant fiscal support and the government might be tempted to offer wage subsidies to avoid job losses. “Even with diesel prices at their peak a couple of weeks ago, we were already seeing logging crews and fishing operators saying it’s uneconomic to operate. The arguments used for wage subsidy schemes in 2020 would still apply.”

The current environment presents a major challenge for policymakers, he noted, arguing the next monetary policy statement should offer deeper analysis as the crisis will have been running for three months by then. 

While the war would have offsetting effects, pushing up some prices before slowing activity, it could prompt the Bank to shift strategy, he argued, noting its ultimate response will rest on how the government reacts. A world that has to adjust to 10 million barrels a day less consumption "is very different from the one we’re living in,” he continued.

Reddell has previously warned of stagflation risk. (See MNI: Energy Shock, Stagflation Risks Cloud RBNZ Policy Path)

BOARD VOTES, TRANSPARENCY

Reddell said the RBNZ’s move last week to make board votes attributable was a step in the right direction, but could encourage more consensus decisions and fewer formal votes.

He called on the Bank to move away from its consensus model and adopt individual voting, like the Bank of England. “Despite its reputation, the RBNZ hasn’t been especially transparent, and the culture has been quite defensive. I expected them to go further.”

He called for compulsory voting, with around 200 words from each member per meeting. "Publishing briefing papers with a lag — say six to eight weeks — would also provide insight into the staff analysis behind decisions.

“It would also be useful to rotate external members through parliamentary select committees every six months or so. They are policymakers, and Parliament should be able to scrutinise them.”

Such reforms would improve transparency but are unlikely to change policy outcomes, he continued. “It’s more about reducing the places to hide and putting a spotlight on members we haven’t heard from. That’s where the real difference will be, rather than in the voting outcomes themselves.”