Analysis-RBNZ's inflation focus tested as rate hikes risk stoking jobs crisis

WELLINGTON - New Zealand's jobless ranks could swell as the central bank ratchets up interest rates, casting the government's inflation‑focused mandate in an unflattering light ahead of a closely contested general election, and raising the prospect of a return to the dual mandate if it loses power.

The conundrum for the Reserve Bank of New Zealand is that although policymakers expect the energy shock from the Iran war to push inflation to 4.3% in coming months - far above the 1% to 3% target band - it comes with the jobless rate hovering at a decade high.

The policy choice, however, is clear, because the National Party-led coalition government removed the obligation to support full employment from the central bank's mandate in 2023, fulfilling a campaign pledge in one of its first acts after taking office.

"We have secondary objectives around not creating unnecessary volatility in output and employment," RBNZ Assistant Governor Karen Silk told Reuters, but the primary objective around inflation is "absolutely front and centre of mind."

The RBNZ forewent a rate hike at its meeting last month in the closest call in its history, but projected a minimum of two quarter-point hikes by year-end.

At the same time, it forecast unemployment to linger at 5.4% for at least a year - a level that prior to the end of last year hadn't been seen since 2015 - which is likely to suppress wage growth and discourage workforce participation.

"Globally, no one has the same anaemic labour market that New Zealand's got," said Faraz Syed, senior economist at Citi, which changed its call from no tightening this year to hikes at both of the next two policy meetings following the RBNZ's hawkish turn.

"If we did have a dual mandate, then it'd be difficult to see how the RBNZ could justify hiking rates at this point in the cycle."

LABOUR EYES REINSTATING DUAL MANDATE

It was a coalition government led by the opposition Labour Party that first introduced a dual mandate back in 2018, and the party told Reuters it was "seriously considering" reinstating it if elected on November 7.

"When it's a dual mandate, it's not just around inflation, it's also around maximum sustainable employment," said Barbara Edmonds, Labour's finance spokesperson.

"It provides an additional tool for the Monetary Policy Committee."

A tightening of financial conditions into a weak jobs market will put Prime Minister Christopher Luxon in an awkward position in the run-up to the election, but it's a predicament of his own making.

When Luxon took over in 2023, inflation was the clear enemy, running at double the top end of the RBNZ's target, whereas unemployment was low and the post-pandemic labour market remained tight.

The economy this time faces the risk of stagflation, with it still struggling to shake off the effects of the RBNZ's last, highly aggressive tightening campaign.

"People have been hurting for the last three years," said Jarrod Kerr, chief economist at Kiwibank. "Raising interest rates - so adding another cost in a cost of living crisis - is just going to make things worse."

POLLS SHOW ELECTION RACE TOO CLOSE TO CALL

Despite the criticism, the government stands by its choice.

"A single focus on price stability is also the best way to achieve the economic growth that creates jobs," Finance Minister Nicola Willis told Reuters, adding that it doesn't mean the central bank doesn't consider the wider economy.

A deeper downturn for employment could tip the balance in an election race that polls show is currently too close to call.

An Ipsos Issues Monitor released late last month found that Labour is viewed as more capable of handling inflation, housing and unemployment, while National retains an edge on more broadly managing the economy.

"Unemployment is going to be a key election issue, because it cuts through all the abstract economic debates," said political commentator Gareth Hughes.

"People might not know the current GDP rate or the inflation forecasts or OCR settings, but they know if their kids or their neighbours have jobs or not."

(Reporting by Lucy Craymer and Stella Qiu; Editing by Praveen Menon and Kevin Buckland)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published June 9, 2026 at 11:27 PM.