Consumer price inflation in New Zealand is not beaten. The Reserve Bank might decide it has cut interest rates a bit too much.

It has cut the official cash rate nine times in just 16 months. 

We will know the decision on 18 February. This is its next scheduled review date.  

Last Friday’s inflation announcement was bad news. The CPI was up by 0.6% in the December quarter, 3.1% in the year.  

That put inflation above the Bank’s 1-3% target range for the first time since June 2024.  

The Bank had forecast in November that the rise would be only 0.2% for the quarter, 2.7% for the year. That forecast likely influenced the Monetary Policy Committee to cut the Bank’s Official Cash Rate to 2.25% in November.  

This difference is troubling. 

Will the pending February decision reverse that cut? That would hurt, particularly in a general election year.  

Higher cash rates lead to higher interest rates for borrowers and depositors.  

Mortgage holders feel high rates straight away. Home owners fear lower house prices. Businesses and others blame the government for causing the recession. People ring talkback radio, Government politicians squirm and others demand relief. 

In contrast, the benefits of stable prices come later and are widely spread. Their source – sound monetary policy – is not widely understood. Support is less intense and vocal.  

For more than two years, to August 2024, the Reserve Bank had fought to bring inflation down. It raised its cash rate seven times to 5.5%.  

It held commendably firm throughout all the pain and criticism. It moved quickly to cut the cash rate as soon as it was clear that inflation was back into the target band.  

Borrowers have been happier, and the government has been purring. 

These lop-sided public and political pressures commonly cause central banks to ease off on inflation too early. Jarring policy reversals are then needed. 

A US Federal Reserve study last year looked at every attempt to bring down inflation between 1960 and 2019 across many countries. Successes were the exception. Most attempts failed because central banks eased too early.  

New Zealand’s system guards against these lop-sided pressures by scheduling regular reviews of the cash rate for public scrutiny. (Seven are scheduled for 2026.) 

The Committee’s February announcement will receive close attention.