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.”
Point of Order 