Reserve Bank chief economist on ‘uncertainty’ and what he misses about Orr

Saturday, 31 May 2025

The Reserve Bank is getting a good handle on how heightened levels of uncertainty over global events are effecting the economy, but it is less clear whether people will adjust if that persists for years or decades, its chief economist Paul Conway says.

Conway quibbles mildly with ASB’s characterisation of the central bank as “flying in the fog”.

But ‘uncertainty’ was the main theme of the day when the central bank issued its latest monetary policy statement and lowered the official cash rate by 25 basis points to 3.25% on Thursday.

The bank isn’t now going as far as to assume any further rate cuts, though it signalled the most likely scenario was that there would be one or two more, taking the OCR to 2.75% or 3% in the months ahead, depending what happens next.

“I don’t really like the phrase ‘data-dependent’ because we're always dependent on the data, but it's more kind of ‘playing the game that's in front of you’, and of course we’ll be back in six weeks,” Conway told The Post.

The other thread running through its monetary policy statement was the absence in the room of former Reserve Bank governor Adrian Orr, who walked out of the bank in March, days after meeting Finance Minister Nicola Willis to discuss her demand for funding cuts at the bank and progress on a review of bank capital rules.

Conway says it's business as usual and that it's been “a very smooth transition”.

“I think this institution is bigger than even Adrian Orr,” he laughs, making reference to Orr’s larger-than-life personality.

“There's a real sense of the ‘show must go on’, and it really has. We miss Adrian. It is a bit less fun around the place, less jokes going on — probably more appropriate jokes,” he smiles again.

“So we miss him, of course. He's a much-loved governor but we are just getting on with it.”

One thing the bank has been able to discern about heightened economic uncertainty is that the bigger effect has been on business investment, rather than household consumption, he says.

Economic literature and the bank’s own research suggest “the more persistent the uncertainty, the deeper the negative effects”.

But Conway says “it's possible that we get to a point where people just adjust their behaviours and ‘uncertainty’ becomes the new normal and we just get on with it”.

“I've got no ‘empirics’ to base that on — it's just, I think, a very interesting thought-stream.”

Willis reached for the defibrillator in the Budget by agreeing to forgo $6.6 billion of tax revenue over the next four years in order to accelerate the speed at which businesses can deduct their flagging capital investments against their taxable profits.

But if investors and households fail to adjust to a world awash with economic doubts, Conway agrees with the suggestion that additional policy interventions might make sense to de-risk decision-making and provide improved safety nets, perhaps through improved social security systems or assistance for business if risks don't work out.

“In a more uncertain environment, I think those are the broader types of policies that would be worth thinking about.

“The good people across the road, I'm sure will be putting thought into the more structural issues,” he says in a nod to the fact those are more matters for elected politicians.

That all said, there are some reasons for cheer, Conway says.

“Interest rates are no longer restrictive. We're in recovery mode. Yes, it's a bit ‘soggy’ in the near term, but there's a lot to like about our situation.”

Illustrating the uncertainties in front of monetary policy, Conway was speaking less than 24 hours after a ruling by the United States Court of International Trade threw the bulk of US President Donald Trump’s global tariffs, including his 10% tariff on New Zealand imports, into serious doubt.

He admits he “doesn’t have a clue” what the actual outcome in relation to the court rulings will be.

The bank’s assessment is that, on balance, tariffs would be best viewed as a “negative global demand shock” that would lower economic growth, including in New Zealand, Conway notes.

“So, yes, if tariffs were to be reversed, at the margin this would mean slightly more medium-term inflationary pressures.”

And that, of course, would mean a lower chance of those further rate cuts materialising.

The Reserve Bank is quite well plugged-into global commentary and analysis and probably wouldn’t benefit from its own lawyers trawling through the US justice system to try and predict developments there, Conway says.

“I don't think we would be any better placed than the US Fed, say, to understand all of that and take a view on the implications for US policy going forward.”