Would RBNZ go the BoE way?

I had pointed earlier that Bank of England is targeting growth not inflation.

In its recent monetary policy meeting Reserve Bank of New Zealand said the economic conditions have deteriorated quite a bit:

Economic activity has weakened more markedly than expected in the Bank’s March Monetary Policy Statement. There have been sharp falls in consumer and business sentiment, exacerbated by tighter credit conditions, a further decline in the housing market and weaker prospects for world growth.

What is RBNZ outlook on inflation?

…..The weaker economy will, over time, ease accumulated pressure on resources and reduce inflation pressure. However, short term inflation is likely to remain persistently high, due in large part to repeated increases in food and energy prices. There is a risk that wage settlements respond to these short term price shocks rather than adjusting to the changing economic conditions, thus perpetuating inflation pressures.

So, how does RBNZ balance the two risks?

We see significant downside risk to future activity but upside risks to inflation. A further risk to the outlook is the persistently strong New Zealand dollar which, while helping moderate headline CPI inflation, remains a drag on export growth.

And the decision is:

Given this outlook, we expect that the OCR will need to remain at current levels for a time yet to ensure inflation outcomes of 1 to 3 percent on average over the medium term.

If you look at the BoE link, you can see the two central banks have indicated very similar economic conditions but have taken an opposite view. BoE sees declining growth as a bigger risk than rising inflation and has reduced its policy rates. RBNZ has done the opposite and hence is actually doing what it should do- target inflation.

Of course, both the economies are different and have a seperate stucture and driving factors. So both Central Banks will take a different stance. But both are supposed to target inflation and the overall mandate is very much the same.

It will be interesting to see if RBNZ continues to manage inflation or turn the BoE way. Another bank to watch out for is Reserve Bank Australia which has so far raised its rates. The recent IMF WEO showed economic activity is declining in Australia but inflation expectations and numbers haven’t.

Really tough times ahead for Central Banks.

One Response to “Would RBNZ go the BoE way?”

  1. RBNZ goes the BoE way « Mostly Economics Says:

    […] goes the BoE way After months of deliberations, RBNZ does go the BoE way. I had mentioned earlier that RBNZ had not been raising rates despite rising inflation and is more concerned with falling […]

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