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MNI INTERVIEW: Fast Services Growth Augurs Renewed Hiring- ISM
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U.S. services activity sped up in August as demand surged and costs remained elevated, while workers scrambled to keep up with orders in a way that suggests employment will expand again soon, Institute for Supply Management services chair Steve Miller told MNI Thursday.
Miller expects the PMI to continue to rise into the end of the year. "I can't see the employment number continuing to be in contraction with the way the new orders, business activity, and backlog are."
The ISM services index increased 1.3ppt to 55.4 in August, above market expectations. New orders rose 3.7ppts to 60.9, the highest since February 2023, while the backlog of orders rose 4.7ppts to 55.6, the highest since February. But the employment index remained in contraction and the price index rose 2.3ppts to 72.6, the highest since August 2022.
"We're seeing considerable strength overall across the services industry," he said, expecting a pickup in employment. "Otherwise, you're going to lose sales, and we're not in an environment where people want to lose sales, because despite all the tariff and Middle East conflict uncertainty people want to hold on to what they've got."
The business activity index increased 2.6ppts in August to 61.7, the highest since November 2022.
CONSIDERABLE TIME
Miller expects the strength in new orders to continue "for a considerable amount of time" and for demand to continue at a strong pace.
"I'm not seeing any signals that they're saying it's not going to hold up. I'm expecting that to continue and increase from the expansion standpoint," Miller said. "We were already high and I'm not seeing any indication that things are dropping."
Elevated backlog of orders also gives some support for new orders continuing, he added.
Miller was disappointed by a still-weak employment index and price measures that increased due to energy prices. Fifteen industries reported an increase in prices paid in August, while no industries reported a decrease in prices. (See: MNI POLICY: Fed Hike In Doubt, Despite Pressure To Deliver)
Tariffs and the Middle East conflict returned as the most cited issues impacting respondents’ supply chains, he said.
The vast majority of survey respondents said they are not filling positions as quickly and they are having difficulty finding talent to fill roles, Miller said.
"The percentage of respondents saying that they're reducing headcount has gone down from 19% to 17%," he said. "A lot of the commentary on employment is about delayed hiring."
The number of industries that are expanding went from 17 in May, to 14 in June, to 13 in July, to 12 in August, but the percentage of GDP that is in expansion has increased, Miller said. The average percentage of GDP represented by expansion in the services sector moved up to 69, versus a 62 last year.
Sep-03 16:57
Federal Reserve Chairman Kevin Warsh is running out of reasons not to follow through on hawkish rhetoric with an interest rate hike as soon as this month, but the arguments for staying on hold that prevailed in July remain in place and a core group of FOMC members still prefers to wait and see how inflation plays out in the second half of this year.
Warsh’s strong words on inflation at Jackson Hole, which made clear that the price stability side of the mandate is the Fed’s primary focus and that there might be "work to do" there, could make it increasingly difficult for the new chairman to justify another hold, particularly against a backdrop of heavy political pressure from the White House that has clouded perceptions of the central bank’s independence.
But ambiguous PCE inflation data last month, on the heels of a softer-than-expected June report, and measures of underlying inflation at roughly 2.5% do not so far make a compelling case for immediate action. Key FOMC members appear to be holding on to hopes that the bulk of what's keeping inflation above target is due to temporary supply factors.
"My decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation. If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level," Governor Chris Waller said Thursday. (See MNI: Warsh Puts Hikes On Table But Not Assured - Ex-Officials)
HAWKISH SET UP
Two points in Warsh's speech Friday indicated rate hikes could be forthcoming, even if one is not delivered in September. The Fed chairman downplayed key dovish arguments for looking through high inflation, namely that wage growth and inflation expectations are contained. By saying the Fed cannot count on either of these for inflation relief, Warsh bolstered the sense of inevitability around rate increases.
The second was his description of financial conditions, which Warsh said he would be “hard pressed” to describe as restrictive. The implication there was that policy rates could well need to be higher in order to effectively dampen price pressures.
Warsh was also very positive about the outlook for growth, employment and consumer spending. While he does not see the Fed’s two mandates as in conflict with one another, a strong underlying economy does remove potential impediments to higher rates.
Many policymakers are worried that disruptions to supply are no longer temporary but a continuous part of the landscape that alters the behavior of businesses and households. In that environment, the conventional approach of looking through such shocks might prove inappropriate, and the new normal neutral rate may well be higher.
In addition, markets are raising the pressure on the Fed, with long-term bond yields surging at least in part due to concerns about the central bank’s commitment to inflation fighting. (See MNI INTERVIEW: Hawkish Warsh Needs To Show He Means It)
WAIT AND SEE
The arguments for holding depend heavily on the newest inflation reports that are expected to show tariff effects waning and the energy shock contained. If there are no more shocks, inflation should resume its glide path down to target without needing more restrictive policy.
Tariffs are estimated to have added a percentage point to inflation over the past 18 months or so, but the much feared second-round effects have not materialized, and the run-up in oil prices has also not broadened out beyond directly-affected sectors. The surge in demand for the AI buildout that has driven prices higher for certain goods is expected to subside when supply catches up.
On the services side, housing inflation continues to cool while difficult-to-measure categories like brokerage services appear to account for a large portion of the rise in non-housing services categories.
Not wanting to weaken the economy unnecessarily, many FOMC members would prefer to put off tightening for now if disinflation is already in train.
"I think that we have to wait and see,” New York Fed President John Williams told CNBC this week. “There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”
Sep-03 15:50
Early European Parliament debate on legislation designed to bolster the European Union’s manufacturing sector as it faces an existential threat from China has centred on how to define “Made in Europe” requirements for public procurement, with some centre-right politicians pushing even for countries like Canada to be included, parliamentary sources told MNI.
This week's public hearing on the Industrial Accelerator Act showed MEPs at odds on Made on Europe as they took advice from industry experts and think tankers.
"There seems to be some consensus to include the UK and the EEA while some are proposing to create new categories for candidate countries and even states with which the EU has concluded FTAs,” the source said. "In terms of labour costs and environmental standards there is already a level playing field (between EU and UK). This legislation is to correct for where there is no level field."
That said, Canada's remains an “open question,” the source said.
The centre-right EPP bloc, especially those members from The Netherlands, the Nordic countries and Poland are pushing for a more expansive definition of Made In Europe in the legislation, whose prime objective, whilst not openly declared, is generally acknowledged to be defence of European industry against China. (See MNI: EU Aims To Reduce China-Dependence, Avoid Trade War)
"How does one evaluate non-EU or even non-European states' eligibility to join the club. How do you evaluate them, what criteria would we use?” the parliamentary source said.
BATTERIES TOO EXPENSIVE
Then there is also the definition of how much of a product can be manufactured outside the EU. The European Commission originally proposed the place of manufacture as "the last place where significant change was made to a product" but this has not satisfied some of the key MEPs managing the legislation's progress.
The hearing also revealed pressure from Germany's Volkswagen to maintain some flexibility over the outsourcing of batteries for smaller and cheaper cars.
One industry representative suggested to MEPs at the hearing that a maximum of 30% of a product's components could be made outside Europe.
The Parliament is due to issue its draft report on the legislation this month with amendments coming at the end of September to early October. A vote is likely in December. The EP and member states are due to agree their own positions on the legislation by the end of the year but the law, which Beijing has said could discriminate against Chinese products, is only likely to be finalised after negotiations between the parliament and Council next year.
Sep-03 15:09
(Repeats story published Wednesday.)
The Bank of Canada needs clear evidence of hot inflation before hiking rates even if the Governor's remarks led investors to advance tightening bets, and the escalating trade war and shaky economic recovery likely keep increases off the table this year, former finance department economist Dominique Lapointe told MNI.
“If they want to move, they need to have more clarity,” Lapointe said in an interview Wednesday after Tiff Macklem held the key rate at 2.25% where it's been all year. “I still see them holding for 2026.”
Two-year Canada government bond yields climbed after the decision and further during the press conference when Macklem said inflation around 3% was too strong and if needed he could hike multiple times. The Governor also said the recent U.S. tariff escalation threatens an economic rebound while tempering that view by saying total GDP won't plunge even if targeted industries are hurt.
Some of the press conference statements on inflation surprised Lapointe given what he said was a more balanced view in the text of the decision.
“It does sound more preoccupied with inflation, which didn’t necessarily reflect in the statement,” said Lapointe, who's now a director of macro strategy at Manulife in Montreal. “If you just looked at those statements from the press conference, you would think that they are ready to raise rates.”
RISKING THE WRONG MOVE
Economists at RBC said in a client note Wednesday that every meeting is now "live" but January remains the most likely starting point. Lapointe said hiking at the next meeting or so would get too far ahead of any resolution of Canada's trade war, which in recent days turned into a round of insults from U.S. President Donald Trump and his officials.
The Bank needs more time to see about further escalation and whether that acts more to slow the economy or to boost inflation, Lapointe said. (See: MNI: BOC Hold Extended Until Tariff Damage Clear -Ex Officials)
“Moving in October given the current data is sort of risking doing the wrong move,” he said. “If inflation really comes out high, we get a beat on the Labour Force Survey on Friday and then we start pricing in 60% or 70% chance of a hike, then we will have to take a guess about the next decision.”
For inflation to accelerate much further past 3% would require a continued rise in energy prices linked to the Middle East conflict, Lapointe said. It's more likely inflation will be elevated for a while and the price bump falls out of CPI calculations, he said.
More likely to trigger the hike Lapointe sees in mid-2027 is a continued economic rebound from Trump's first round of tariffs that also heats up the job market. “That means that you can actually normalize up interest rates because if you don’t it maybe in 2028 you get that demand induced inflation,” he said. “If you do it right now I don’t think you can say… growth won’t be impacted.”
Sep-03 11:05
The Reserve Bank of New Zealand is trying to balance achieving its inflation target with protecting growth, which could lead to a slower pace of tightening than otherwise though it remains data-dependent, its Chief Economist Paul Conway told MNI.
“We talk about balancing … wanting to support employment and growth with … getting a bit done in terms of removing stimulus from the economy, so that we don't have to do more … sort of go higher later,” Conway told MNI following Wednesday’s decision to raise the Official Cash Rate 25 basis points to 2.75%. (See MNI RBNZ WATCH: Breman Takes Cautious Stance On Further Hikes)
“It's a question of degree … obviously if we can get inflation down while supporting growth that's better than getting inflation down by derailing recovery.”
It is still unclear whether the OCR will need to reach restrictive levels to bring inflation back to the 2% midpoint target, Conway said.
“Our projection currently for the OCR is it goes a bit above 3%. I still think that's sort of in the bounds of neutral, especially when you think about neutral OCR being a bit higher than our long-run neutral, which is 3%," he said.
“Things are moving around and it's a volatile environment, and a lot could happen. We've got our eye on the prize, which is 2% inflation at the end of next year.”
DATA-DEPENDENT
However, Conway cautioned that incoming data will determine the timing of further rate hikes, and that much will depend on the extent to which inflation, projected to hit 3.9% later this year, feeds into expectations and medium-term price pressures. The Monetary Policy Committee is seeking to preserve optionality as the global and domestic economies enter a period of greater uncertainty, with inflation increasingly being driven by supply rather than demand, he said.
“We think there's a bit more to come, but timing's pretty uncertain. Not on a predetermined path, not mechanical, but the data is going to really matter from here on,” Conway said. “We've still got some chunky numbers to come.”
The MPC’s decision to retain optionality is also reflected in the OCR track, which was little changed from May, Conway added.
INFLATION AND GROWTH
Although the inflation shock is primarily supply-driven, domestic economic conditions remain important because they determine the environment in which the shock is absorbed, Conway said. Upside risks to growth also remain, with household consumption a key uncertainty.
Household confidence is returning and elevated precautionary saving could provide a buffer for consumption, but households could also remain cautious given the challenging global environment, Conway noted.
The Bank sees risks on both sides – consumption could remain weak, creating downside risks to growth, or rebound sharply enough to close the output gap more quickly than expected. “It's a challenging balance for monetary policy at the moment, threading an interest rate through to maintain low medium-term inflation pressures without derailing the recovery.”
Conway rejected the suggestion that the RBNZ was remiss in pausing in May, noting that New Zealand was among the first countries to respond to the oil-price shock. (See MNI INTERVIEW: RBNZ July Meeting Live - Conway) The differing pace of policy moves across countries also reflects differences in domestic economic conditions before the shock, Conway said.
The RBNZ's approach has been to balance supporting employment and growth with removing enough monetary stimulus to avoid having to tighten more aggressively later, he continued. "We've done 50bp, which is why we are sort of saying, 'okay, we want to see what that does to the economy.'"
FORWARD GUIDANCE
Conway supports the continued publication of the Bank’s OCR track, saying it provides useful information about how policy could evolve while stressing that it is not forward guidance.
The Bank reserves the right to change the track as economic conditions change and would be reluctant to provide guidance on what it will do at a specific future meeting, particularly in an uncertain environment.
Financial-market participants have come to understand the role of the OCR track, which is also consistent with the Bank’s projections for returning medium-term inflation to 2%, Conway said.
Sep-03 08:18The Bank of Canada needs clear evidence of hot inflation before hiking rates even if the Governor's remarks led investors to advance tightening bets, and the escalating trade war and shaky economic recovery likely keep increases off the table this year, former finance department economist Dominique Lapointe told MNI.
“If they want to move, they need to have more clarity,” Lapointe said in an interview Wednesday after Tiff Macklem held the key rate at 2.25% where it's been all year. “I still see them holding for 2026.”
Two-year Canada government bond yields climbed after the decision and further during the press conference when Macklem said inflation around 3% was too strong and if needed he could hike multiple times. The Governor also said the recent U.S. tariff escalation threatens an economic rebound while tempering that view by saying total GDP won't plunge even if targeted industries are hurt.
Some of the press conference statements on inflation surprised Lapointe given what he said was a more balanced view in the text of the decision.
“It does sound more preoccupied with inflation, which didn’t necessarily reflect in the statement,” said Lapointe, who's now a director of macro strategy at Manulife in Montreal. “If you just looked at those statements from the press conference, you would think that they are ready to raise rates.”
RISKING THE WRONG MOVE
Economists at RBC said in a client note Wednesday that every meeting is now "live" but January remains the most likely starting point. Lapointe said hiking at the next meeting or so would get too far ahead of any resolution of Canada's trade war, which in recent days turned into a round of insults from U.S. President Donald Trump and his officials.
The Bank needs more time to see about further escalation and whether that acts more to slow the economy or to boost inflation, Lapointe said. (See: MNI: BOC Hold Extended Until Tariff Damage Clear -Ex Officials)
“Moving in October given the current data is sort of risking doing the wrong move,” he said. “If inflation really comes out high, we get a beat on the Labour Force Survey on Friday and then we start pricing in 60% or 70% chance of a hike, then we will have to take a guess about the next decision.”
For inflation to accelerate much further past 3% would require a continued rise in energy prices linked to the Middle East conflict, Lapointe said. It's more likely inflation will be elevated for a while and the price bump falls out of CPI calculations, he said.
More likely to trigger the hike Lapointe sees in mid-2027 is a continued economic rebound from Trump's first round of tariffs that also heats up the job market. “That means that you can actually normalize up interest rates because if you don’t it maybe in 2028 you get that demand induced inflation,” he said. “If you do it right now I don’t think you can say… growth won’t be impacted.”
Sep-02 20:40
Bank of Canada Governor Tiff Macklem held the 2.25% policy rate Wednesday and his first decision since a new escalation of the U.S. tariff fight said upside inflation risk has increased while growth is less certain but tariffs are unlikely to deliver a major blow to GDP.
"Upside risks to inflation have increased, while new tariffs make growth prospects more uncertain," Macklem and his deputies said in a statement. "Governing Council will assess the sustainability of the economic rebound and the outlook for inflation, and is prepared to adjust monetary policy as needed."
The risk of stubborn inflation also increases the longer the boost to energy prices brought on by the Iran war lasts, the Bank said, though there's little evidence so far of that kind of spillover. The Bank also dropped a phrase it used in the minutes from its last decision about the policy rate being appropriate.
U.S. tariffs create a narrow but intense hit on autos, steel and aluminum makers which Bank officials have said monetary policy isn't well-equipped to tackle. Macklem also said earlier this year that multiple hikes may have been needed if high energy prices following the Iran conflict created wider inflation or that major new tariffs might have required a cut.
Even with GDP growing at a 3.3% annualized pace in the second quarter business investment and exports will continue to be pressured by the recent tariff escalation. (See: MNI INTERVIEW: Canada Nowhere Near Recession- Ex BOC Adviser)
"Recent data reaffirm Governing Council’s view of a broadening recovery in Canada’s economy. However, uncertainty is high and new US tariffs and threats of further action pose risks to the sustainability of the recovery," officials said. Businesses appear to be adapting to tariffs but slack in the economy remains, the Bank said.
Prime Minister Mark Carney says he will will impose counter tariffs on USD20 billion of goods on Sept. 8 and economists estimate the trade fight will dent growth by a few tenths of a percent while inflation will quicken by a similar magnitude. Trump has also threatened more tariffs on Jan. 1, a threat markets have dismissed because of the long lead time and his leaving out exports like energy and potash.
There's no risk-free move given the speed of monetary policy compared with geopolitical developments, Macklem has said.
The overnight rate rate has been unchanged since October after four cuts to the low end of the Bank's neutral range and Wednesday's decision was expected by all economists in an MNI Ottawa survey. Investors and analysts generally see the Bank hiking early next year with firms adapting to the hit from the first round of tariffs imposed during the spring of last year.
Inflation reached the top of the central bank's target band for the second time in three months in July on gasoline prices while the average for core rates remained near a six-year low and at the Bank's target for total inflation. The Bank in July said headline inflation could slow to target early next year from recent levels around 3%.
Sep-02 14:10
The Reserve Bank of New Zealand has signalled its intention to move the Official Cash Rate back towards neutral, suggesting at least one further hike to 3%, but any move into more restrictive territory would require time to assess economic conditions, Governor Anna Breman told reporters.
“We're stressing that we're not on a preset course for the OCR,” Breman said, following the Monetary Policy Committee's widely expected 25-basis-point hike to 2.75%. (See MNI RBNZ WATCH: MPC To Hike, Signal More To Come) “It's been a volatile environment. We do think that it's likely there may be a future OCR increase, but the timing is highly uncertain.”
The Bank's latest Monetary Policy Statement lowered the Q4 OCR outlook 3bp to 2.81%, while the Q1 2027 forecast was lowered to 2.96% from 3.00%. OIS swap rates fell 6-8bp following the publication, with markets pricing a 30% chance of an October hike, down from about 60% before the decision. The market-implied OCR for December fell to 2.98% from above 3%.
Breman said the OCR track remained largely unchanged from the May forecasts despite the near-term adjustments.
"We're still saying it's likely there will be further increase in the OCR, but the timing is highly uncertain, because we will consider the effects of the two hikes that we've done now, and also all the new information, and how that is affecting the medium-term inflation outlook."
CONSENSUS REACHED
The MPC reached consensus on the 25bp hike, although Breman said members had differing views of the risks around the central inflation projection.
Some members saw greater upside risks to inflation and others viewed the risks as more balanced, she added, noting members also agreed that continued weakness in economic activity could dampen inflationary pressures.
Chief Economist Paul Conway said consensus around the decision was strong and that he and fellow MPC Member Carl Hansen viewed inflation risks as balanced.
"We've got inflation at 3.9% and as the effects of the oil shock wash through the economy, those direct effects are likely to diminish, but the indirect effects of oil prices... we're likely to see that take a few more quarters to fall out of the inflation data, and I think that's balanced risk-wise," he said.
New Zealand's economy also faces significant uncertainty from a strong export sector and structural changes in areas including electricity and the labour market, Conway said. "Our current strategy is about a gradual and calibrated withdrawal of stimulus. We think that remains appropriate, but economic conditions change, and we will change our strategy as as the world around us evolves."
NEUTRAL RATE
The Bank raised the upper bound of its short-term neutral rate estimate slightly, although Breman stressed the considerable uncertainty around its precise level, though the estimate of the long-run neutral rate remains around 3%. This uncertainty is one reason the Bank needs time to assess the effects of rate increases already delivered, she added.
However, Conway cautioned that the short-term neutral rate may be higher than the Bank's estimate of the long-run neutral rate. The OCR is now moving into that zone, making it particularly important for the Committee to assess the effects of previous rate increases, irrespective of the precise level of neutral, he concluded.
Sep-02 06:56
China will deploy interest subsidies, guarantees and investment funds to stimulate credit and support key sectors as it strengthens fiscal-monetary policy coordination to counter weaker monetary transmission, policy advisors told MNI.
Liu Shangxi, vice president of the China Society of Macroeconomics, said closer coordination can improve policy transmission efficiency, particularly as the economy faces strong supply and weak demand.
Interest subsidies and financing guarantees can ease constraints on corporate borrowing caused by debt pressures and weak profitability, he said, noting bank lending becomes more difficult as debt accumulates and real interest rates remain elevated.
Government deposits at the central bank have remained around CNY5 trillion for years, while slower government spending can leave base money trapped in treasury accounts, offsetting monetary easing efforts, he said.
The contraction of the two traditional sources of credit expansion – real estate and local government financing vehicles – adds to the need for deeper fiscal-monetary coordination to unblock the flow of funds, Liu continued.
The Ministry of Finance and People's Bank of China recently announced plans to optimise the existing CNY100 billion fiscal-financial coordination fund, expanding the scope of interest subsidies to include working-capital loans to small and medium-sized enterprises and credit-card instalment consumption. The ceiling for SME loan interest subsidies has also been raised. (See MNI PBOC WATCH: LPR To Hold, Structural Easing In Focus)
Yuan Haixia, director of the Research Institute at China Chengxin International Credit Rating, told MNI that compared with previous rules, which mainly subsidised fixed-asset lending, the broader programme is better positioned to meet SMEs' working-capital needs.
Given the weak recovery in consumption, lowering the cost of instalment financing could unlock consumer credit demand without materially increasing fiscal expenditure, Yuan said. If authorities cover 1% of loan interest costs, CNY1 of fiscal interest subsidies could support about CNY100 of loan principal, creating a significant leverage effect, she estimated.
The CNY100 billion programme has supported more than CNY20 trillion in new credit issuance, implying a nominal leverage multiple of about 200 times, Yuan added.
Liu said the fund would boost household consumption and support a recovery in private investment. Optimising its scope and scale should further strengthen its role in stimulating demand, he said.
NEW POLICIES
The Ministry of Finance has said it will introduce additional fiscal-financial coordination measures in the remainder of the year, with Yuan predicting incremental policies will focus on optimising existing tools, accelerating fund allocation and improving spending efficiency.
If policy effects fall short of expectations, authorities could expand the scope of interest subsidies, raise quotas or extend subsidy durations, she said. Authorities could also expand guarantee programmes for private investment and risk-sharing schemes for private corporate bonds. (See MNI INTERVIEW 2: China's Econ Restructure Needs More Support)
Yuan added that CNY800 billion of new policy-based financial instruments is likely to be deployed by the end of Q3 or early Q4, with scope for a further increase depending on economic conditions.
Fiscal-financial coordination is likely to focus on three main instruments, Yuan said, including interest subsidies to lower short-term financing costs; guarantees and risk compensation to support technology innovation and SMEs facing high risk premiums; and government investment funds, policy-based finance and REITs to provide long-term capital to sectors driving new quality productive forces.
Liu said fiscal authorities and the central bank could, when necessary, jointly establish a special-purpose vehicle to facilitate local government debt restructuring and mitigate risks from arrears, hidden debt and operating debt at local government financing vehicles. This would create broader scope for future policy coordination, he said.
However, Yuan cautioned that the objective should not be to maximise the multiplier of fiscal funds, but to direct limited fiscal resources towards areas where market mechanisms are insufficient, financial institutions are reluctant to bear risks, and projects have strong positive spillovers and long-term growth potential.
POTENTIAL RISKS
Yuan cautioned that while interest subsidies are an important short-term policy tool, they should not become permanent or universal. Excessive reliance on fiscal subsidies could weaken lenders' market-based risk pricing, encourage credit allocation to inefficient enterprises and channel low-cost funds into areas lacking investment or consumption demand, creating opportunities for arbitrage.
Excessive household subsidies could also encourage over-borrowing, increasing debt-servicing pressures while household balance sheets remain under repair, she said.
Future interest subsidy programmes should include clear exit mechanisms and focus on whether fiscal funds are leveraging new financing and generating effective demand, rather than simply expanding loan volumes, Yuan concluded.
Sep-02 05:07
The Reserve Bank of New Zealand would find communicating its reaction function more difficult should the Labour Party win November’s national election and reinstate the Bank’s dual mandate, potentially leading to a more patient approach to returning inflation to the 2% midpoint of its 1-3% target range, former Assistant Governor John McDermott told MNI
"They may have a reaction function that is appropriate but communicating that to financial market participants will be a real challenge," said McDermott, now executive director at Motu Economic and Public Policy Research, adding that communication can be more challenging than policy formulation.
A dual mandate that also targets employment, combined with what appears to be a relatively dovish governor, could also lead the MPC to take a more patient, Reserve Bank of Australia-style approach to returning inflation to target, he said, pointing to Governor Anna Breman’s deciding vote to hold the OCR at 2.25% in May. (See MNI RBNZ WATCH: Gov Breman Says Hike Incoming After Hold Vote)
Opposition Labour has pledged to restore the RBNZ’s dual mandate, requiring it to target maximum sustainable employment alongside price stability if elected in the Nov 7 general election. The National-led coalition government removed the employment objective in December 2023, shortly after taking office, returning the RBNZ to a single mandate focused on price stability.
Recent polling has shown a tight race between the major parties, with Labour and National virtually tied at an average of about 30% each. Labour has led National in most major polls since May, although its support fell sharply to 24% in Roy Morgan’s August poll, which put National ahead on 31%. Support for the centrist Opportunity Party has also risen, with its 9.5% in the latest Roy Morgan poll enough to potentially give it the balance of power.
McDermott questioned the wisdom of restoring the employment objective while inflation remains above the target band and unemployment is rising.
A dual mandate would give the Bank greater political cover to move more slowly on inflation, although it would ultimately still have to return inflation to target, he said. Policymakers would initially be more patient and maintain more moderate interest rates, but risk allowing inflation to become entrenched and requiring higher rates later, he added.
Policymakers could find themselves caught between elevated inflation and a weak labour market, he said.
FURTHER TIGHTENING
McDermott expects the Bank to raise the OCR to 3% before the end of the year, with the exact hike dates determined by Q3 CPI data due Oct 22.
With core inflation 60 basis points above target and headline inflation well outside the target band, the Bank has little choice but to hike, he said, though he reiterated his earlier view that further increases beyond 3% would depend on the inflation data. (See MNI INTERVIEW: RBNZ At Neutral Midpoint By December)
McDermott said a key question was why New Zealand's interest rates should differ so significantly from Australia’s given their similar economic relationships. Australia’s economy is performing somewhat better, he noted, but argued that this alone did not explain the divergence in interest-rate settings.
Sep-01 23:10About
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