It’s not every day that we get to hear from a member of the RBNZ Monetary Policy Committee. But last week, we had the pleasure of hosting Professor Prasanna Gai at a Kiwibank client event. It was a great opportunity to gain some colour around how he views the current challenges our economy faces. We discussed plenty, with topics ranging from macroeconomics, monetary policy, financial markets, geopolitics and central bank independence.

Some of the key takeaways:

• Tariffs have acted as a negative demand shock. And the precautionary behaviour by businesses and households in response to the shock has offset some of the monetary easing delivered by the RBNZ.
• Pointing to a recent speech, central bank communication is critical, especially in times of heightened uncertainty. Central banker influence extends well beyond the policy rate and to the beliefs that govern private action.
• Ideally, a temporary spike or fall in inflation should both be looked through. But the initial conditions matter. The current state of the real economy influences to what degree a deviation from target inflation can be discounted.
• Theoretical concepts like a neutral rate or the non-accelerating inflation rate of unemployment (NAIRU) are difficult to draw on in practice. Because guesstimates can be so wide-ranging. In reality, you don’t know when you’ve reached these levels, until you’re past it. It will be the data that provides that discernment. For instance, just because the cash rate is in ‘stimulatory’ territory, doesn’t mean more is not needed if the economy has not responded.