How one Covid case derailed a central bank
New Zealand made the right call to shelve a widely anticipated interest-rate increase. The central bank should resist the temptation to merely delay by a month or two. The global recovery has probably peaked and the most consequential monetary authorities in the world are loath to contemplate tightening for at least a year. This isn’t the time for New Zealand to be ahead of the curve.
The Reserve Bank of New Zealand kept its benchmark rate at 0.25 per cent yesterday after a national lockdown — announced because of a single case — injected last-minute drama into a decision many economists previously thought was a sure thing. While the country lived Covid-free for months, officials have confirmed seven infections the past two days. The shift was enough for the RBNZ to demur.
That the Governor, Adrian Orr, still wants to hike is clear. The “least regrets” policy stance involves further reducing monetary stimulus to keep inflation in check and buttress employment, the bank said in a statement. Officials agreed, “however, to keep the [rate] unchanged at this meeting given the heightened uncertainty with the country in a lockdown”. Projections published by the RBNZ show the official rate climbing at least once later this year.
It takes a lot for a central bank to be blown off-course on a well-telegraphed change. While a few cases shouldn’t be enough to do so, they do point to the weakness in New Zealand’s otherwise promising economic scene. When you consider some of the basic metrics, withdrawal of accommodation is justified: inflation pushed through the bank's 1 per cent to 3 per cent target last quarter, a totemic issue for a country that inaugurated the practice of having a target three decades ago. The labour market appears robust; unemployment fell to 4 per cent and wage growth is the highest in more than a decade. This trajectory is possible because New Zealand ran a controlled experiment within effectively closed borders. Such an approach can work for the short term. Whether it is a sound basis for longer-term monetary planning is another question.
This rosy domestic picture was always vulnerable to the delta variant, which is taking a serious toll in important parts of Asia. After a rapid expansion at the start of the year, China’s rebound has become sluggish. In neighbouring Australia, gross domestic product is likely to contract this quarter. US stocks posted their biggest decline in a month on Tuesday amid concern that the global economic recovery will lose momentum with further shutdowns to contain the coronavirus resurgence. New Zealand will have trouble extracting itself from this backdrop.
History isn't particularly encouraging, either. The RBNZ has a tendency to raise rates as the rest of the world plays things cautiously. While this has become a badge of pride domestically, it has not always ended happily. When the central bank began raising rates in 2014, it did so quickly. At the time, the Federal Reserve was only gradually trimming quantitative easing, while the European Central Bank and Bank of England were keeping the price of money very low.
New Zealand's approach was hailed as a sign of masterful policymaking and performance. But one year later, officials had to backtrack, and rates started coming down, as Bloomberg economist James McIntyre noted this week. (He correctly predicted Orr would balk on Wednesday.) The reversal then was attributed in part to low inflation, which reflected a global phenomenon that Janet Yellen, then the Fed chairwoman, called a “mystery”.
These days, monetary chiefs like to describe the spurt in inflation as “transitory”. They may be right — which makes any pace of rate hikes look too fast. New Zealand would do well to examine the global picture carefully over the next few months. The bank made the right call yesterday. Rather than this deferral being a lesson for the world, officials ought to take the lead from bigger powers. There is plenty of time time to get this right.
• Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America