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Inside economics: one‑shot or two? Why the RBNZ’s interest‑rate call is so tricky
When the Reserve Bank of New Zealand (RBNZ) calls its official cash rate, the whole country pauses. A single number – 6.75 % as of May 2024 – has the power to shift mortgage rates, bond yields, and the New Zealand dollar. Yet the decision to lift, hold or cut that rate is far from a simple “yes” or “no”. It is a balancing act that blends economic data, market expectations, and the inherent uncertainty of a global economy that is still re‑shaping itself after a pandemic‑induced shock.
The RBNZ’s policy framework
The RBNZ’s Monetary Policy Committee (MPC) meets monthly, on the first Wednesday, to assess “price stability” and “sustainable economic growth” – its statutory dual mandate. The official cash rate is the policy rate that the RBNZ targets. It is a short‑term rate that the RBNZ influences by buying or selling government bonds in the open market, thereby controlling the money supply.
The MPC’s policy decisions are announced in a concise statement that usually contains four key pieces of information:
- The new policy rate (or confirmation that it remains unchanged).
- The RBNZ’s inflation forecast for the next 12–18 months.
- The outlook for growth, employment and the exchange rate.
- Any forward guidance that signals potential moves in the future.
These statements are accompanied by a policy rate diagram (a chart showing the RBNZ’s rate path over the next few quarters) that investors and the public often scrutinise for clues.
“One‑shot or two” – the dilemma of rate cuts
The article, “Inside economics: one‑shot or two? Why the RBNZ’s interest‑rate call is so tricky”, zeroes in on the debate that has been simmering as the RBNZ considers easing policy. In the headline, the authors refer to the classic question: Should the RBNZ cut rates in one big move, or in two smaller steps? This is not merely a technical question about basis points; it is a question about timing, risk, and credibility.
Why a single, large cut (the “one‑shot”) can be risky.
Cutting by, say, 25 basis points in one go could signal to markets that the RBNZ is confident that inflation will not rise sharply in the next few months. However, if inflation or wage growth were to accelerate, the RBNZ could find itself in a situation where it had already loosened policy and now has to tighten again – a move that can erode its credibility. The market might also view a big cut as an attempt to prop up the NZ $ or support a sluggish housing market, which could have unintended macro‑financial consequences.
Why a staggered approach (the “two”) can be safer.
A more cautious approach would be to cut by, say, 10 basis points now and keep the policy rate at that level for a few months, observing how inflation reacts. If inflation remains stable or falls, the RBNZ could then cut another 15 basis points. This incremental strategy allows the RBNZ to “take its eyes off the ball” in a disciplined way, maintaining a buffer against a potential uptick in price pressures. It also signals that the RBNZ is willing to adjust to new data, which can be reassuring to markets.
The role of forward guidance
Forward guidance is a cornerstone of modern central‑bank communication. By signalling potential future moves, the RBNZ can shape expectations and influence market rates even before it actually changes the policy rate. The article points out that forward guidance can be a double‑edged sword. On the one hand, a clear path can reduce uncertainty and support the currency. On the other hand, overly explicit guidance can create “policy shock” if reality diverges from expectations.
In recent years, the RBNZ has refined its guidance style. It now prefers to provide a “probability framework” – for example, “there is a 60 % chance the rate will stay at 6.75 % until the end of 2024” – rather than committing to a specific move. This approach is meant to give markets a sense of direction without locking the bank into a rigid path.
Economic data – the real decision‑maker
No matter how the RBNZ wants to frame its communication, the data must ultimately drive the decision. The article highlights several key indicators:
- Inflation: The RBNZ’s core inflation target remains at 2 % ± 1 %. The latest consumer price index (CPI) data show a headline inflation of 8.5 %, but core inflation is easing to 5.2 %. A sustained rise in core inflation would prompt the RBNZ to tighten policy sooner.
- Growth: GDP growth has been hovering around 2.5 % annually. A slowdown would justify a rate cut to support spending.
- Employment: Labour market data suggest a tight market, with the unemployment rate at 3.8 %. Rising wage pressures could feed inflation.
- Exchange rate: The NZ $ has been volatile, influenced by global interest‑rate differentials. A weaker currency could add import inflation.
The article argues that the RBNZ must weigh these data points against global developments, such as the U.S. Federal Reserve’s tightening stance, the Bank of England’s easing cycle, and commodity price fluctuations.
Bottom line
The RBNZ’s interest‑rate call is “tricky” because it sits at the intersection of monetary theory, empirical data, and market psychology. A “one‑shot” cut offers immediacy but risks credibility; a “two‑step” approach provides flexibility but may delay necessary support. Forward guidance helps shape expectations but must be tempered by data‑driven flexibility. Ultimately, the RBNZ’s challenge is to maintain price stability while keeping growth on track – a delicate balance that will continue to shape New Zealand’s economy in the coming months.
For further reading, the RBNZ’s official policy statements can be accessed at https://www.rbnz.govt.nz/our-role/monetary-policy, and the New Zealand Herald’s coverage of monetary policy is available at https://www.nzherald.co.nz/business/economy.
Read the Full The New Zealand Herald Article at:
[ https://www.nzherald.co.nz/business/economy/inside-economics-one-shot-or-two-why-the-rbnzs-interest-rate-call-is-so-tricky/RJLEG4IQVZFMJGUEMYDLW7UDTQ/ ]