RBNZ governor must curb inflationary pressures while keeping an eye on employment trends

Reserve Bank governor  Adrian Orr   has  a lot on his  plate  at present. He  is  battling  to hose  down prices which have  been rising  faster  than they  have  done for  30  years,  while  at  the  same  time  “maximising” sustainable   employment.

It’s  a  task  none of his predecessors had  to undertake.  Finance  Minister Grant  Robertson  widened  his  remit  to include full employment, but probably  didn’t  expect the  job  being put  to the  test so soon.

And, of  course,  Robertson’s future  as  finance  minister  will  hang  in the  balance, particularly  if  inflation  is  still raging  when  electors  go the  polls  next  year.

Ironically, too,  it  was the   government’s decision for  the  printing   of  money  by  the  Reserve  Bank  as  the  country  returned  to  something  like  normal  after  the Covid  lockdowns, which  stoked  the fires  of inflation.

Some  might  see   elements  of  Greek  tragedy   taking  shape.

Meanwhile  the  pundits  are  saying the  RBNZ  tomorrow is set to deliver a fourth consecutive 50-basis-point rise in the official cash (OCR), lifting it to a seven-year high of 3%, as it continues its all-out assault on an inflation rate which has reached a 32-year high.

It will be the seventh rise in the OCR since last October, the most aggressive tightening cycle since the current monetary policy system was instituted in 1999.

Radio  NZ  reckons the accompanying statement and forecasts will seek to reinforce the idea the tightening it is not yet complete while  the  NZ  Herald’s  Liam  Dann sees  the economy  in   a  holding  pattern while  inflationary and  recessionary  forces  grapple  for  ascendancy.

Over  in the  Beehive   ministers  will  be  hoping  that  price rises  are  past  their  peak  as  appears  to have happened in the  US.

But  the  Reserve  Bank in this country in July talked  of  tightening    “at pace”  and  some  authorities  believe inflation pressures are  stronger  than expected.

BNZ head of research Stephen Toplis, as  Radio  NZ  reported, said for all the ructions on financial markets and economic numbers, little had changed of late.

“Once everything is thrown into the mix, the outlook for New Zealand inflation and the labour market is little changed from what the Reserve Bank was looking at when it delivered its July Monetary Policy Review or, for that matter, its May Monetary Policy Statement.”

The June-quarter inflation numbers, with consumer prices topping the RBNZ’s guess at 7.3%, blew away even the vaguest chance the central bank might contemplate easing back off the interest-rate brakes on the economy.

The RBNZ has a dual mandate from government – keep inflation in check, and maximise “sustainable” employment.

Toplis  says  by any measure it has under-achieved on the first, and overdone it on the second, with the unemployment rate at close to record lows and wages rising at the fastest rate in more than a decade.

ASB chief economist Nick Tuffley said:

“The domestically-generated pressures are set to remain for some time, with the labour market a key influence on how persistent inflation pressures will be.”

In the absence of an influx of foreign workers, or improved productivity, the RBNZ had to reduce demand in the economy, including the demand for labour, Tuffley said.

That would mean continued tough talk and economic forecasts to match, notably the projection of where the OCR might reach.

The RBNZ’s May forecasts implied the OCR sitting at 3.5% by the end of the year and possibly near 4% by the middle of next year, before the chance of rate cuts towards the end of 2024.

ANZ  Bank’s  chief  economist  Sharon Zollner says monetary policy takes time to feed  through  the economy,

“… but  one thing’s for  sure, with  inflation so  high … and  wages rising so fast, under a  least-regrets  framework, the RBNZ can’t  afford to make optimistic   assumptions  about the  degree of effective  monetary  tightening  it is delivering.”

So,  there is  a  load  of  pain  still  coming, in the shape of rising mortgage costs  for  those  who have  paid  high prices for  houses in  the  past  year  or  so, or  who are looking  at buying  their first  home.

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