By Lucy Craymer
WELLINGTON, Oct 1 (Reuters) – A redefined mandate for New Zealand’s central bank and policy reversals are among the prospects provoking unease among investors and businesses as a single-term government looks possible for the first time in more than five decades.
Sharper political divisions also threaten renewed policy upheaval in a country long highly regarded for its political stability, which has not ousted a government after a single three-year term since 1975.
New Zealand’s stable reputation is now being tested as a bitterly fought election looms on November 7, when opinion polls suggest Prime Minister Christopher Luxon’s coalition could lose power.
“You’ve got a lot of very inexperienced people. You’ve got relatively short-term governments,” former Labour Prime Minister Helen Clark told Reuters. “We didn’t used to be like this. We had longer-term vision.”
Investors see a risk that a change of government will bring on policy upheaval at a time when the small, capital-hungry economy is emerging from a slowdown and needs certainty to spur private investment.
Since taking office in late 2023, the National-led government, backed by New Zealand First and ACT, enacted some major policy changes, including reviving mining and reinstating offshore oil and gas exploration. It has returned the Reserve Bank of New Zealand (RBNZ) to a single inflation-focused mandate, dropping the employment mandate added by its Labour predecessor.
Now, if elected, Labour has signalled it would restore that dual mandate, among other policy reversals.
“There will have to be some scaling of ambition,” Labour leader Chris Hipkins told Reuters, referring to road projects not yet funded.
On the RBNZ, Hipkins said a dual mandate was mainstream internationally, citing Australia and the United States, while pledging transparency over changes.
“The dual mandate for the Reserve Bank absolutely makes sense. It’s not radical,” Hipkins said.
Luxon’s government has blamed the central bank’s dual mandate for allowing inflation to run too high, an issue he promised to address on taking office.
DIVIDED FOCUS
Some economists, however, said restoring employment to the central bank’s objectives could complicate its efforts to bring inflation under control, at a time when central banks globally remain focused on price stability.
Markets have ramped up bets that the RBNZ will have to hike interest rates a third time to 3.0% next month.
The OECD grouping of nations cautioned against frequent changes to the central bank’s mandate and remit. Stability between scheduled five-year reviews helps preserve the predictability, credibility and confidence essential to effective monetary policy, it said.
In a note, analysts at Westpac said: “We believe a restored dual mandate could result in a slightly slower return of inflation to target.”
Other effects could be a slower rise in, or slightly lower peak for, the Official Cash Rate, and greater tolerance of temporary inflation overshoots when labour-market conditions are weak, they added.
SMALL PARTIES, BIG INFLUENCE
While elections typically matter for headline confidence, policy uncertainty can also deter investment intentions, said Christina Leung, chief economist at the New Zealand Institute of Economic Research.
“The uncertainty is more around how much influence those smaller parties end up having, because they do have more radical policies,” Leung said.
Smaller parties always play a role under New Zealand’s proportional voting system, but it is magnified this time as poll averages put them on about a third of support, sufficient for substantial leverage in the next government.
New Zealand First, led by populist right-wing leader Winston Peters, has proposed buying NAB-owned BNZ, breaking up supermarket operator Foodstuffs into regional cooperatives and returning the central bank to a single mandate.
The Green Party has said it would revoke some fast-track approvals for mining projects.
The current government illustrates the risk to policy. After taking office, it cancelled Auckland Light Rail andwound up Wellington’s significant roading programme.
Infrastructure New Zealand Chief Executive Nick Leggett said politicisation had worsened over the past decade, creating a “stop-start” model that leaves contractors and public agencies unable to plan with confidence. The industry body estimates that pausing, delaying or cancelling projects has cost the country NZ$11.8 billion ($6.7 billion) over the past 25 years.
“We’ve got to reduce the sugar hit that politicians get from announcing or cancelling or politicising a project,” Leggett said.
($1 = 1.7668 New Zealand dollars)
(Reporting by Lucy Craymer; Editing by Praveen Menon and Jacqueline Wong)
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