New Zealand the leading country in interest and inflation

New Zealand is a guide country in the world. In 1840 the European settlers made an agreement with the native population. At that time, the indigenous peoples in many other European colonies had hardly any rights.

In 1893, New Zealand was the first country to give women the right to vote. New Zealand is also a guide country when it comes to central banks. Almost all central banks have been 'inflation targeters' for more than 2 decades: they all aim for a certain inflation (range) in the medium term. However, there is one exception: the central bank in New Zealand does this for about 1 years longer. In February 10, the New Zealand government passed a law requiring the central bank to focus on inflation. The others followed in the years that followed.

Less focus on inflation
There is a good chance that monetary historians will designate New Zealand as the monetary guide country for the second time. The Wellington government recently changed the law. Besides the fact that the central bank must aim for a certain inflation rate, it must now also try to maximize employment. In doing so, they are moving away from the traditional 'inflation targeting regime'.

If, among others, the Fed and the Canadian central bank (and hopefully also the European Central Bank) review their monetary strategy, this could mean that they too will ease their focus on inflation in the future. When that happens, New Zealand has once again provided the kick-off nicely. Slightly closer to home is another area where I wouldn't be surprised if the New Zealand central bank leads the way for the Fed, the European Central Bank (ECB) and others.

At the beginning of week 20, the interest rate committee in Wellington announced that it would cut the official interest rate to 1,5% and the bank opened the door to further cuts. I wouldn't be surprised if the Fed and the ECB start following their New Zealand counterparts in a few quarters. This is because economic growth has rebounded recently, after a dip in the last months of last year.

Nor will I be surprised if growth continues to surprise positively for the time being. However, from the end of 2019 and the beginning of 2020, I do anticipate another slowdown in growth in the United States. This is because by then the Fed's past hikes will begin to dampen economic activity. Since the Americans will elect a new president in 2020, I see 2 parties that now do not give each other anything. As a result, they will not agree on tax cuts next year. This increases the chances of US President Donald Trump's re-election.

Only 10 years of growth
To stay in the southern hemisphere, I hope that the European Union and the United States will follow New Zealand's neighbor Australia in economic terms. The Australian economy has been growing continuously since 1991, which is the longest period of economic expansion since economic growth is measured. However, the probability that we will follow Australia is equal to this position of the ECB rate or at most the Fed rate. In the United States, the economic expansion will last 10 years next month.

It is more likely that my favorite club FC Emmen will surpass the success of Ajax this year and thus make it through the Dutch championship to the final of the Champions League and win it. To ride the Elfstedentocht a few weeks later. That probability is greater than economic growth in the United States (and the eurozone) remaining positive through 2036.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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