Professor Robert MacCulloch: Proof that NZ's Reserve Bank has Inflicted Unnecessary Pain up and down the Nation.

In the past few hours, it has been stated that the US economy grew at a solid 3% rate last quarter, as given in the American government's final estimate. New Zealand's economy, on the other hand, shrank at a rate of -0.2%. The US Federal Funds rate (the equivalent of NZ's Official Cash Rate, OCR) is currently set at between 4.75 & 5 percent. By contrast, our OCR is presently at the higher rate of 5.25%. Meanwhile inflation in NZ was just over 3 percent for the June 2024 year, whereas inflation in the US was just under 3 percent for that same year.

Given the Kiwi economy is hugely weaker than the US, and our inflation rates are almost the same, its a no-brainer that the Official Cash Rate should now be set far lower in NZ than the US right now - not higher. 

This Blog [Down to Earth Kiwi] has consistently argued monetary policy was way too loose in NZ during the pandemic. The RBNZ $100 billion money printing program - one of the world's largest - was a knee-jerk reaction, especially when the virus did not ravage NZ remotely like it did many other nations during 2020-21. 

Then in another panicked knee-jerk reaction, the Reserve Bank Governor announced he was "engineering a recession" with punishingly higher interest rates to get the inflation he created back down again. 

The rest of the world is currently enjoying a "soft landing", which this Blog argued years ago that NZ should also have aimed for. 

The fact interest rates are higher here than in the US when our economy is stagnant & theirs is booming is revealing of a gross error in our monetary policy.

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.