Reserve Bank “not in a good place”, admits governor. This was the headline Radio NZ News ran over a report of RBNZ governor Adrian Orr speaking to an International Monetary Fund seminar.
He might have added that the average Kiwi consumer is “not in a good place”, either, when doing the daily shopping, with food costs soaring and inflation rising at a faster rate than it has for nearly 30 years.
But isn’t it Orr’s job to keep inflation under control – or can he pass the buck (as it shrinks in value) to the Monetary Policy Committee?
And whatever happened to the inflation target?
Orr does concede that the RBNZ was caught on the back foot, but argues that was the same for many other central banks, as a result of supply chain shocks and the Russian invasion of Ukraine, which had exacerbated inflation pressures.
Moreover, he contends the RBNZ had been “reasonably aggressive” in ending its bond-buying programme last year and moving to lift the official cash rate, and is also balancing risks.
“If you go too fast or too high … you run the risk of having a sharper than needed slow down in economic activity,” Orr said in a recorded interview.
“If you go too slow, it’s inflation expectations that will get away from us and at the moment the balance of risks, as far as the Monetary Policy Committee is concerned, is very much weighted toward constraining those inflation expectations in the medium term to be within the target range.”
How does this wash with average New Zealanders who find the purchasing power of their pay packets shrinking by the month?
Independent economists were talking at the beginning of the year of the need to suppress the rising inflationary pressures, and some were arguing even before the Monetary Policy Committee met on February 23 of the possibility of a 50 basis point rise in the Official Cash Rate.
In the event the OCR was raised only 25 basis points.
Orr told the IMF seminar that before the pandemic the central bank’s biggest worry had been deflation not inflation, but conceded the RBNZ was now “not in a good place” and the policy direction was clear.
“We need to tighten monetary conditions and that’s what we’ve been about.”
The RBNZ raised its official cash rate (OCR) by 50 basis points to 1.50% last week.
A growing number of analysts believe it will follow that up with a further 50 basis point rise in May, with the prospect the OCR will have been lifted to 3.25% by early next year.
That will be no delight to new mortgage holders, who will be facing hefty rises in their weekly outgoings.
The debate is now focussing on whether inflation will become ingrained.
Already trading banks are acting, with the BNZ announcing new higher fixed home loan rates, matching some of the new higher ANZ rates in the competitive zone in their rate cards.
The BNZ has gone from having some of the lowest big-bank rates in the 12-, 18- and 24-month sector of the market to now having the equal highest.
Its one-year fixed carded rate is up 56 bps to 4.55%; its 18-month is up 55 bps to 4.90%, and its two-year carded rate is up 56 bps to 5.25%. ANZ no longer has those levels of rates on its own, says Interest.co.nz’s David Chaston.
Given the speed and relentlessness of recent swap rate hikes, it won’t be long before all the other big banks join them.
Let’s hope the Reserve Bank governor can make the right calls from now on in getting inflation under control.
He may need the assistance of Finance Minister Grant Robertson in keeping a tight grip on the fiscal side of the equation. Correction – he will need it.
This makes the 2022/23 Budget due out on May 21 one of the most fiscally sensitive in recent years.
The Monetary Policy Committee – by the way – has six members and is responsible for formulating monetary policy in New Zealand, directed towards the economic objectives of:
- achieving and maintaining stability in the general level of prices over the medium term; and
- supporting maximum sustainable employment.
Adrian Orr is one of three internal RBNZ members.
The Official Cash Rate is the interest rate set by the Reserve Bank to meet the dual mandate, set out in a Remit to the Monetary Policy Committee.
The current Remit, signed in February 2019, defines price stability as annual increases in the Consumers Price Index (CPI) of between 1 and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.
There is no numerical target for supporting maximum sustainable employment.