Australians watching the economic drama unfold across the Tasman might find the plot familiar: An economy shrinks far faster than anyone forecast. Manufacturing slumps. As the gloom deepens, the blame game begins.

Yet what is happening in New Zealand is more than the usual grumbling. It is an extraordinary pile-on. A powerful and highly unusual coalition has formed with a single, unified demand for the Reserve Bank: deep cuts, now.

The country’s leading newspaper, The New Zealand Herald, is demanding it. The Prime Minister has broken with convention to say it; his Minister of Finance has all but ordered it (though both have provided nominal support for central bank independence). Leading bank economists are calling for it, with one declaring the central bank “behind the eight ball”. Even popular radio hosts have joined in, announcing the Bank has “stuffed this up”.

When economies tank, central banks often cop the blame. This time, however, the blame is misplaced.

Yes, the RBNZ overstimulated the economy during the pandemic. And yes, it had previously also got itself distracted by matters outside its core price stability mandate. It was rightly criticised for these failures at the time, including by this writer.

But this is not the point anymore. The RBNZ is now facing criticism for its subsequent actions, and it is that criticism which is not warranted.

When New Zealand’s inflation rate peaked at 7.3 per cent in June 2022, the RBNZ faced something far more dangerous than mere rising prices. Inflation expectations threatened to break free from their anchor.

If people believe inflation will stay around 2 per cent, it usually does. Workers moderate wage demands. Businesses set prices accordingly.

But if those expectations break loose and people start believing high inflation is here to stay, wage-price spirals like those of the 1970s result. Once that inflation genie escapes, getting it back in the bottle takes years of economic pain.

New Zealand was particularly vulnerable. Research shows Kiwi firms’ inflation expectations are poorly anchored compared to other developed economies. By early 2023, those expectations were drifting dangerously. The RBNZ was staring down a genuine crisis.

The critics of the RBNZ love comparing New Zealand unfavourably with Australia. The RBA took a gentler approach, they say. It “did not drive their economy into a hole”, as Kiwibank’s chief economist Jarrod Kerr put it.

Both central banks faced similar inflation surges and brought it back on similar timelines. By June 2025, inflation was 2.1 per cent in Australia and 2.7 per cent in New Zealand.

If the RBNZ had overtightened, inflation would be undershooting the 2 per cent target. Future inflation expectations would be too low.

Instead, inflation is pushing the upper limit of the target band, but staying within it helped by lower petrol prices. Professional forecasters’ expectations hover near the 2 per cent midpoint, although household expectations remain elevated.

Still, the Reserve Bank fulfilled its remit.

But while the RBNZ was slamming on the brakes, something else was happening. The New Zealand government was hitting the accelerator – first under the previous Labour government but continued under the new coalition government, too.

Budget 2024 delivered $3.7 billion in annual tax cuts. Ministers claimed “fiscal neutrality” by allegedly trimming spending elsewhere. Not that the deficit looked any better for it.

Back then, the Reserve Bank diplomatically warned that this timing mismatch posed “an upside risk to aggregate demand”. Translation: the government’s tax cuts meant interest rates had to stay higher for longer.

The International Monetary Fund was blunter. New Zealand’s structural deficit, the kind that persists even in good times, was 2.8 per cent of GDP, among the largest in advanced economies. The IMF urged genuine fiscal neutrality for any tax relief. The structural deficit persisted.

Think about what this looked like to financial markets. New Zealand’s central bank was desperately trying to convince everyone it was serious about crushing inflation. Yet the government was simultaneously pumping stimulus into the economy. These two arms of policy worked at cross-purposes.

The fiscal-monetary disconnect meant the RBNZ had no choice but to keep rates higher than they otherwise would have been. It certainly did not help New Zealand’s economy to grow, but that is unsurprising when fiscal and monetary authorities are pulling in opposite directions.

The political attacks on the RBNZ are more than just unfair. They are dangerous. When prime ministers publicly second-guess interest rate decisions, they undermine the foundation of monetary policy.

Central bank independence exists because politicians face elections. They feel the pressure from mortgage-holders and struggling businesses. They are tempted to pump up the economy for short-term gain. Independent central banks can resist those pressures and take tough decisions.

A fundamental irony is that, early in its term, the current Government amended the RBNZ’s mandate. The Ardern government had added employment to its remit. The Luxon government returned it the single goal of keeping inflation between 1 and 3 per cent. Now that same Government is criticising the Bank for doing precisely that, arguing it should be supporting growth instead.

The Reserve Bank delivered on the contract the Government gave it. The critics are essentially attacking the RBNZ for its success. The alternative, tolerating high inflation to avoid short-term pain, would have embedded a larger crisis.

Both Australia and New Zealand should learn from this episode. Central banks can fight inflation alone, but it is much harder when fiscal policy works against monetary policy.

Yes, the RBNZ made mistakes during Covid. There was too much stimulus for too long. They have now (grudgingly) admitted that, although the profligacy of the government also played a part.

But once the Bank realised the monetary overdose they had administered, they did what had to be done. Attacking it now for cleaning up the mess, while the government’s own policies made that cleanup harder, is harmful.

The calls for aggressive rate cuts certainly make great headlines. But monetary policy is not a popularity contest. The RBNZ’s mandate was to restore price stability. And that mission is on-track, despite the headwinds.

Monetary policy needs a coordinated partner in government, not a critic working at cross-purposes.

To read our research note "Monetary policy without mates: Why the Reserve Bank is right to focus on price stability", click here.

To read the full article on The Australian website, click here.