Turning Three Recessions Into a Policy Win

(Bloomberg Opinion) — Monetary policy, all going well, isn’t supposed to be a spectator sport. Full of insights and fascinating asides, for sure, but rarely lending itself to upheaval. Yet that is what unfolded this week in a small but closely watched economy. The lessons are global in scale.
The Reserve Bank of New Zealand undertook a pivot for the ages. The authority went from projecting a very hawkish view of the world in May to executing a surprise quarter-point trim in its main interest rate — and intimating a meatier cut was contemplated. Instead of reckoning on no easing before late 2025, officials now see multiple reductions over the same time horizon. Despite this major change, policymakers are reluctant to call their stance anything other than restrictive. Conditions are merely less tight than they were. As if actions must be shrouded in stealth. 
It’s wise to shift when circumstances change, but have they really changed that much in three months? The economy has been in the doldrums for a while, in large part as a consequence of the aggressive tightening that began in late 2021. The slowdown is likely to be protracted. The RBNZ confirmed what many private-sector economists already figured: The country is facing not just a double-dip recession, but a triple crown. Gross domestic product is forecast to contract this quarter after a probable decline in the three months that ended in June. Far from ideal, but a long way from global shocks like the 2007-2009 financial crisis, or the pandemic, that upended policy everywhere. 
More likely, a tipping point was reached. The drip, drip, drip of sour news had been accumulating. Mercifully, or perhaps as a result, inflation began to retreat significantly. The pace of price gains isn’t exactly back to within New Zealand’s desired 1%-3% band, but within striking distance. This gave policymakers an opening, which they were eager to take. “The move is a reminder that inflation-targeting central banks won’t wait until inflation is back to target before dialing back their tightening — if the growth outlook deteriorates enough,” wrote James McIntyre of Bloomberg Economics.
Price-busting is often about context. Like many central banks, the RBNZ is also required to heed labor conditions. Such mandates are proxies for worrying about growth as well as inflation. When monetary guardians have multiple jobs to do, and there is the prospect of tension between them, they will often frame the task like this: Inflation hurts everyone and the best thing we can do to foster a strong economy is to ensure price stability. RBNZ Governor Adrian Orr underscored that approach during a media conference. Inflation is nobody’s friend, he reminded a skeptical audience.
True enough, but Orr could have done with expressing a little more empathy while cameras were rolling. What did the bank recognize now that wasn’t apparent last time, he was asked? Did officials make a mistake? He should have been prepared for such a grilling: It’s part of the modern central-banking game. He urged journalists to read the documents and reminded them — forcefully — that forecasting is an imprecise exercise. Abandoning the effort just because you might be proved wrong isn’t the solution.
Some of the discourse was unnecessarily combative and the responses cringeworthy. People are struggling. Was it a relief to finally ease policy? Yes, because it means inflation is getting under control. Fear not for growth: “It’s darkest before dawn,” Orr said. He came close to framing recession as a win.  
The Antipodean volte-face was the right call. It’s just a pity it took so long. Orr is correct that projections are often qualified and that many people simply don’t pick the nuances. But it was apparent in May that inflation was on the way down, and that the global central banking fraternity was beginning to switch its attention to when, not if, to relax a little. The European Central Bank was laying the ground for a cut in June. Switzerland began loosening in March.
The cost of such a shift at the RBNZ won’t be zero. Next time the bank really wants you to believe what it says, take a moment. Officials love to talk about data dependence. We can look at numbers, too, and they added up to a subdued outlook for growth and, by implication, prices. The fresh approach, however you describe it, was a long time coming.  
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.
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