Key facts
- New Zealand's central bank is prioritizing inflation control over employment, risking job losses.
- Inflation is projected to reach 4.3% while unemployment remains at a decade high.
- The government removed the central bank's dual mandate in 2023, focusing solely on price stability.
- The RBNZ is expected to implement at least two interest rate hikes by the end of the year.
- The opposition Labour Party may reinstate the dual mandate if elected in November.
New Zealand's central bank is navigating a challenging economic landscape where efforts to curb inflation through interest rate hikes risk exacerbating unemployment, a situation that could influence the upcoming general election. The Reserve Bank of New Zealand (RBNZ) anticipates inflation will climb to 4.3% in the coming months, significantly above its 1% to 3% target band. This rise is partly attributed to global energy shocks stemming from the Iran war.
However, this inflationary pressure coincides with a high jobless rate, which is expected to persist at 5.4% for at least a year, a level not seen since 2015. This presents a dilemma for the RBNZ, especially since the current National Party-led coalition government removed the central bank's obligation to support full employment in 2023, making price stability the primary objective. RBNZ Assistant Governor Karen Silk emphasized that inflation is "front and centre of mind," though secondary objectives regarding output and employment are considered.
The RBNZ recently held interest rates steady but has projected at least two quarter-point hikes by the end of the year. Economists like Faraz Syed from Citi note that a dual mandate, which was in place from 2018 under the previous Labour government, would make justifying rate hikes in the current weak labor market difficult.
The opposition Labour Party has stated it is "seriously considering" reinstating the dual mandate if elected on November 7, with spokesperson Barbara Edmonds highlighting its importance for "maximum sustainable employment." This policy choice by the current government places Prime Minister Christopher Luxon in a politically sensitive position as the election approaches, particularly as the economy grapples with the effects of previous aggressive monetary tightening and faces stagflation risks.
Finance Minister Nicola Willis defended the government's stance, arguing that a singular focus on price stability ultimately fosters economic growth and job creation. Political commentators suggest that unemployment will be a critical election issue, potentially swaying voters who are more concerned with job security than abstract economic indicators. Polls indicate a close race, with Labour seen as stronger on handling inflation, housing, and unemployment, while National leads on broader economic management.