First mover disadvantage
It was not that long ago that New Zealand was once referred to as the ‘rock star’ economy. A rather infamous quote from a bank economist describing our envious economic position at the time relative to our global peers. This reference was premised around three key factors (i) above trend growth, (ii) a residential housing boom and (iii) rising dairy prices driven by strong demand from China.
At the time, the Reserve Bank were compelled to raise interest rates on fears of an overheating economy due to inflationary pressures. This strategy of raising interest rates out of step with other developed economies ultimately proved to be a policy mistake, and the RBNZ were forced to unwind or lower back interest rates.
If we fast forward seven years to present day, the rhetoric is starting to sound very similar. If we compare our central bank to the Reserve Bank of Australia (RBA), the messaging could not be more different. The RBA have been resolute in their commitment to keeping interest rates low. In their July 2021 statement, they reiterated that they would not move until their inflation targets were sustainably above the target band and they did not see this condition being met until 2024.
If we look at the RBNZ July 2021 meeting they have already delivered a ‘hawkish’ surprise by bringing an end to the bond buying program a lot earlier than expected. The Committee agreed ‘that the level of monetary stimulus could now be reduced to minimize the risk of not meeting its mandate’ and that ‘more persistent consumer price inflation pressure is expected to build over time.’ Are they changing tack already? Remembering this is the same central bank that said they were not ‘bluffing’ on negative interest rates only to back away from those comments in the space of mere months.
There is no doubt that the pressure is building on every outsized data print. In fact, one of the major banks described the second quarter CPI print as monstrous! However, this is not a time for the RBNZ to lose its nerve, quite the contrary. The current situation in Australia is a timely reminder of the difficulties businesses and households face. We now have record levels of debt at both a public and private level. We are an export nation who favor a weaker currency and yet as this juncture it appears we are contemplating being a first mover on increasing interest rates.
The next few months are likely to be critical as the central bank walks a tightrope around stronger than expected data versus assessing the transitory nature of it. The phrase first mover advantage is a familiar one, all I can see is first mover disadvantage.