Mortgage holders will wince as RBNZ takes another shot at bringing inflation back into the target zone

The  Reserve Bank  has  raised  the  official cash  rate  to  2% – but will  that  slay  the  inflationary  beast roaming  the  countryside.? 

Point of  Order   doesn’t  think  so.

Reserve Bank governor  Adrian  Orr made  the right  belligerent  noises  as  he  fired  the  bullet  today  but  he  needed  a  fiscal -policy volley  from  Finance Minister Grant Robertson  to  demolish   the  monster.

Inflation, according  to Robertson,  is  all  due  to overseas  factors — the  war  in the  Ukraine, supply  chain  congestion,  China’s  economic  problems,  you  name  it  — but  little  has  been  done  to  contain  it in  the  term of  the  Ardern  government.

As Professor  McCulloch pointed out  in the  NZ  Herald with reference to a  document  signed  off   and “agreed by”  the Finance Minister and Reserve Bank Governor, it says inflation in NZ is to be held at 1 to 3 percent over the medium term.

“Yet on Budget Day, Treasury released its inflation forecasts which are HIGHER than 3% for 2022, HIGHER than 3% for 2023 and HIGHER than 3% for 2024.

“It was also over 3% this past year, 2001.

“Yes this inflation is not temporary, it is not ”transitory’. 

“New Zealand will NOT be achieving its agreed inflation target, not even remotely, over the ‘medium term’.

“My question is: since when can a Finance Minister and a Reserve Bank Governor put their signatures to an ‘agreed; course of action, then willfully ignore it? In monetary economics, we call it a loss of credibility”.

Inflation  is  now  running  so   strongly that  many  economists  think  NZ  is  heading   into  a  recession.

The  first  effects   of  the  Reserve Bank  hiking the  OCR  will soon  be  felt  by mortgage  holders,  with  predictions that  somebody   carrying  the  average mortgage  debt  assessed  at $260,000  will  be  paying  an  additional $1925 a  year  in interest repayments.

The  Reserve  Bank  itself pointed  to the  pain  ahead foreshadowing much higher rates ahead as it chases down inflation.

The Monetary Policy Committee said it sees the cash rate rising to at least 3.25 per cent this year and it was “resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 per cent target range.

“A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment,” the Committee said.

The New Zealand dollar rallied sharply to US65c after the 2pm release from US64.33c earlier  ine  the  day.

In new forecasts it indicated the cash rate may now peak at 3.9 per cent in June 2023 – as opposed to its previous forecast at 3.4 by end of 2023.

The 50 basis point hike was widely anticipated but the forecasts and tone of the statement suggests an increasingly aggressive approach.

“The pace of global economic growth is slowing….European geopolitical uncertainty is also weighing heavily on business confidence and investment intentions worldwide,” the Statement said.

“Likewise, COVID-19 restrictions in significant regions of China are exacerbating supply chain disruptions and adding cost and complexity to trade.”

It reiterated its confidence in the local economy to weather the downturn.

“In New Zealand, underlying strength remains in the economy, supported by a strong labour market, sound household balance sheets, continued fiscal support, and a strong terms of trade.”

“The reduction in COVID-19 health-related restrictions is also enabling increased economic activity, including hospitality and tourism.”

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