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Will Govt Cash Support Be Counterproductive To RBNZ’s Monetary Policy Tightening?


  • The Reserve Bank of New Zealand has resorted to monetary policy tightening to suck excess liquidity in its fight against inflation.
  • But the government is providing cash support to households in the wake of the rising cost of living.
  • The two forces seem to be in conflict, but macroeconomic indicators in the coming months will give a clear picture of the outcomes.

Multi-decade high inflation has become a concern for most large economies, including the US, which has responded to inflationary forces by hiking rates at a pace never seen before. New Zealand also falls in that landscape. The Reserve Bank of New Zealand (RBNZ), the country’s central bank, is also following a monetary policy, that aims to suck excess liquidity from the economy and make debt costlier so that demand comes down. But are countries worldwide, including New Zealand, adopting a counter-productive fiscal policy approach that can negate the endeavours of their respective central banks?

Will the NZ government’s support payments, targeted at providing cushioning to over 2 million households to soften the inflation blow, make the rate hikes by central banks ineffective?

Pandemic, Keynesian economics, and inflation

John Maynard Keynes was one of the most popular economists during the days of the Great Depression. The Cambridge-born macroeconomist gave the idea of 'twin' measures during times of subdued growth. He suggested that by combining fiscal and monetary policy measures, an economy can quickly reverse concerns like negative growth and lack of job creation.

The pandemic months were a time when the Keynesian model made sense. By using fiscal policy maneuvers, which involved spending money heavily on support measures, governments across the world undertook ambitious and unprecedented actions. Their respective central banks also supported by either regularly slashing rates or maintaining them at near-zero levels.

The Reserve Bank of New Zealand (RBNZ) also considered negative rates in the wake of lockdowns and stagnated economic activity during the early pandemic phases. In May 2020, the central bank announced an aggressive bond purchase program and signalled the advent of negative interest rates to steer the economy during the tough phase.

Arguably, no central bank at that point of time had imagined that this aggressive liquidity injection would lead to an uncontrollable inflationary situation in the coming months. Most central banks then said that inflation is transitory and will reduce with improvement in the supply. 

Cut to October 2021. The RBNZ had to raise the official cash rate (OCR) for the first time in seven years. The motive was to put a brake on rising property prices and inflation on essential items. By July this year, successive rate hikes by the RBNZ have taken the OCR from a humble 0.25% during the pandemic days to 2.5%. 

Also read: Inflation higher in NZ than Australia: Check out responses of central banks

Continued support measures

Recently, Carmel Sepuloni discussed the Ministry of Social Development and Employment’s Wage Subsidy support during the pandemic. The program mirrored similar endeavours by other governments, including the CARES Act in the US and Canada Emergency Wage Subsidy (CEWS) in Canada.

The ministry's report highlighted that nearly 70% of employed men and more than half of employed women were supported in 2020 by New Zealand’s wage subsidy benefits. Fewer needed the support in 2021, thanks to economic recovery and reopened businesses and borders. 

But inflation wreaked havoc, and this led to new support measures, including the Cost of Living payment.

Beginning August, eligible kiwis -- the government put the figure at 2.1 million -- have started receiving $116 a month for a total of three months. The measure is a part of the government's Budget 2022 Cost of Living package. A recent statement by the government confirms that together with the Winter Energy Payment support, the Cost of Living payment will reach over 80% of New Zealanders. 

The other similar direct and indirect supports by the government include a $27 a week temporary cost of living payment for those earning less than $70,000, and a reduction in fuel excise and road user charges.

Also read: NZ to have quick rate hikes, signals RBNZ Governor

Productive or counter-productive?

It is easy to understand why the RBNZ has done away with QE. The latest 50 basis points hike in OCR in July indicated that the central bank is willing to go to all extents

 to rein in inflation that hit 7.3% in June, the highest since 1990.

However, many economists argue that direct cash handouts may negate or limit the outcomes of the hawkish monetary policy of the central bank. While the stance of the RBNZ is unequivocally targeted toward restricting access to money, fiscal policy measures of the government seem conflicting.

As of now, no one can say whether the monetary and fiscal policies of New Zealand are working in tandem or if they are counter-productive. Meanwhile, the economy contracted in the March 2022 quarter, and New Zealand's GDP per capita also declined.

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