(Bloomberg Opinion) -- Sometimes being first is an undesirable superlative. Predictions that New Zealand will be among the primary batch of central banks to raise interest rates roiled markets this week — a signal that, even for historically hawkish places, taper talk is a delicate affair.
The Reserve Bank of New Zealand's projection that its benchmark interest rate will start to climb by the end of 2022 was a shock to investors. Government bonds retreated and the local dollar jumped on expectations the country would join Canada in scaling back stimulus. RBNZ officials said that the domestic and international economies are healing after epic contractions. “Some of the more extreme risks are now off the table, touch wood,” Governor Adrian Orr told reporters after a policy meeting Wednesday, where he kept rates near zero and maintained quantitative easing.
Yet Orr wasn't quite oozing with confidence either. At the press briefing, he and his colleagues spent almost as much time discussing caveats as they did asserting conditions might be right for liftoff. He even told Radio New Zealand that a reduction isn't off the table. “Given the uncertainties to both the upside to our forecasts and downside, we remain willing to shift the (official cash rate) up or down. We just see our central projection of keeping it where it is and with a bias to having to increase it sometime late next year.”
New Zealand's pace of expansion isn't exactly blistering. The bank estimated gross domestic product probably fell in the first quarter after dipping in the final three months of last year. Growth will recover to 3.4% by March next year, according to the latest forecasts, compared with expectations of 1.4% in February. Like policy makers in many countries, RBNZ officials think rising prices aren't a major threat and any short term jump will be temporary. Inflation will accelerate to 2.6% this quarter, breaching the midpoint of the bank's 1% to 3% target range, before retreating to 1.5% by mid-2022.
This all might be an argument for resisting further rate cuts. It's less convincing as a precursor to hikes. That's why it makes sense for Orr to keep his options open, given how unpredictable the path of the virus has become. New Zealand is a tiny economy dependent on what's happening beyond its shores. The Federal Reserve, European Central Bank and Bank of Japan are going nowhere fast on rates. While Covid isn't much of a domestic threat to New Zealand at the moment — neither the bank chief nor reporters at the press conference wore masks — that's largely because the country has sealed itself off, barring air travel bubbles with Australia and the Pacific.
To that end, Orr tried to buy himself some wriggle room: “I know too often it falls on deaf ears, these are highly conditional projections. You are talking about the second half of next year. Who knows where we will be by then?” If the traditionally hawkish RBNZ is having a hard time with the messaging, just imagine the tantrums more dovish central banks will endure when it comes time to wind back stimulus.
We can only hope Orr's more confident assessment turns out to be correct. Given the world is emerging from the deepest slump in almost a century, the bar is pretty low. With the exception of China, Asia isn't looking so great. Renewed Covid-19 outbreaks are spurring crackdowns in Southeast Asia, Taiwan and Japan, raising questions about projections of a muscular economic recovery.
Judging by all his qualifiers, you could be forgiven for believing Orr didn't want to provide rate-hike projections at all. To be sure, there's an argument for less information amid the quickly shifting landscape of the Covid era. Few of us are epidemiologists. But if you are going to forecast the beginning of the end for excessive accommodation, a more full-throated defense might be warranted. Otherwise, prepare for a bumpy ride.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
©2021 Bloomberg L.P.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
