Do central banks have to snuff out growth to do their job?
The question isn’t a new one, but it’s about to get more attention. New Zealand, a tiny place with a big role in economic history because of its early deployment of inflation targets, has skidded into recession. More countries are bound to follow, with uncomfortable scrutiny falling on policymakers. Everyone wants inflation to come down. Few are impressed with the bill when it does.
Monetary policy was, at the very least, present at the demise of the Kiwi expansion. And it had a motive: Reserve Bank of New Zealand Governor Adrian Orr had forthrightly stated that he was trying to induce a recession with aggressive interest-rate hikes. This isn’t as malicious as it might sound; Orr was merely being more candid than his counterparts. Most have spent the better part two years trying to combat price increases by ratcheting up borrowing costs, the intent being to put the brakes on economies to the point where inflation begins to meaningfully retreat.
Colorful language aside, the issue is pertinent today. Officials can’t bring themselves to wrap tightening. The rate cuts once confidently foreseen by traders and some economists look more distant. Policy seems to be predicated on the idea that you can actually hear inflation snap — and that the break will be audible when and where needed to forestall a painful downturn. It’s an enormous gamble, but people have convinced themselves that a distressing end is almost inevitable, if not desirable. Nobody wants to be the central banker that let inflation become entrenched, to go down in history as the person who ruined the legacy of Paul Volcker, the Fed chief credited with crushing inflation in the early 1980s. Mopping up from job losses will be tomorrow’s problem.
What does all this have to do with New Zealand? The country was an early mover in raising rates, beginning in October 2021. The central bank lifted borrowing costs a cumulative 5.25 percentage points in less than 20 months, a brisker clip than the Fed. Asked at a parliamentary hearing last year if his objective was to generate a recession, Orr responded: “Yes, that is correct. We are deliberately trying to slow aggregate spending in the economy.”
Mission accomplished. Gross domestic product fell 0.1 percent in the first quarter, compared with the final three months of last year, when GDP declined 0.7 percent. That’s not a deep downturn, so far. There’s more than the RBNZ at work in this outcome; a devastating cyclone dealt the economy a blow early in the year. The central bank owns the downturn, nevertheless, and will be held responsible for its depth and duration.
Economists at JPMorgan Chase & Co had plenty to fret over in their recent mid-year review of the global outlook. By their estimate, benchmark rates have gone up almost 400 basis points since the start of last year. While inflation has come down around the world, core levels will stay well above 3 percent through December 2024. The global expansion isn’t about to collapse overnight, JPMorgan says, though the prognosis is sobering. A slowdown will take hold next year: With inflation likely to remain persistent, the path is unlikely to incorporate any meaningful opportunity for a pause. Instead central banks look likely to continue to lean against still-elevated inflation risks. In this scenario, they may not be intending to create a downturn. But the risk that they may “boil the frog” by tightening too far has increased.
When Yellen and Bernanke mused on the lifespans of cycles at the American Economic Association annual meeting in January 2019, Bernanke noted that he didn’t, at that point, see anything or anyone lurking behind the curtain ready to deal a blow. COVID would ultimately do that. This current expansion may meet a more conventional end.
Give Orr his due. He may not have made many friends, but there was little doubt about the potential cost of fighting inflation. It can’t be done on the cheap.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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