Three central banks, the US Federal Reserve, the Reserve Bank of Australia and the Reserve Bank of New Zealand have announced decisions on their Official Cash Rates in recent weeks.
Peter Nicholl
The US Fed was first and was also the most cautious. On January 29 it left their cash rate unchanged at 4.25 to 4.5 per cent.
The reasons given were that inflation remained ‘somewhat elevated’ and the future path of global inflationary pressures had become uncertain.
They did not mention the Donald Trump effect, but you could see his shadow behind the caution.
Australia was next. On February 18 it reduced the cash rate by 25 basis points to 4.1 per cent.
The bank said the ‘turmoil in global inflationary pressures could derail further easing’. It had also become cautious about the global inflation outlook.
New Zealand was the last of these three and the most optimistic.
On February 19 the reserve bank reduced the cash rate by 50 basis points to 3.75 per cent.
Our reserve bank now has a rate significantly below the other two. What’s more, it predicts further cuts this year and that the cash rate could come down to 3 per cent by the end of 2025. The bank did refer to ‘geopolitics, including uncertainty about trade barriers’ in their statement. But their concern was that this was likely to weaken global growth.
Unlike the Fed and the RBA, our reserve bank did not seem to see these geopolitical events and uncertainties as also having inflationary risks.
It said the Consumers Price Index was near the mid-point of their 1-3 per cent target band and ‘the economic outlook remains consistent with inflation remaining in the band over the medium term’. This is a more optimistic and confident view than shown by the other two banks recently.
The domestic component of our inflation is still above the top of our reserve bank’s target range. The reason that our CPI is within the bank’s target band is that imported inflation has been low, at times even negative.
The Fed and the RBA are worried that could be about to change. But our reserve bank, rather than becoming more cautious because of these global uncertainties, said it now expected to cut the OCR faster through 2025 than it had announced last November.
Lower interest rates here could put further downward pressure on our exchange rate. Our dollar has fallen almost 6 per cent on a trade-weighted basis in recent months. A lower exchange rate is good for exporters – but it isn’t good for inflation.
The reserve bank took the OCR too low during the Covid period and kept it low for too long. At the time, they referred to this policy as one of ‘least regrets’. They seem to have dropped that phrase.
But I fear they are starting to make the same mistake of claiming victory over inflation just as other central banks have become worried that the beast could be waking up again.
