The cost-of-living crisis in NZ has become ugly. And it could get worse.
The Reserve Bank is telling us the country will dive into recession from the middle of next year and stay there for a year. Plus there will be 8% mortgage rates and 6% unemployment.
For Finance Minister Grant Robertson, it’s all turning to custard. He appeared to lose his cool in Parliament as the Reserve Bank in effect might have been writing a poison pill for the Ardern government to swallow.
In the summary of its meeting minutes, the Reserve Bank’s monetary policy committee noted inflation pressure from fiscal policies was skewed to the upside.
“They’re quite clearly saying there that the government is contributing to inflation, or certainly not helping the case to get it under control,” said Brad Olsen, principal economist at independent consultancy Infometrics.
“If households are being hit with those higher costs and having to readjust their spending, then the government also needs to quite seriously consider its spending priorities and how it can best support efforts to rein in inflation.”
As Point of Order sses it, the possibility of Robertson writing a budget next year that could rescue the Ardern government from annhilation at next year’s poll have been effectively snuffed out by the man that the Finance Minister had reappointed this year for another 5-year term.
As the Dominion-Post headlined its report: “Bank lines up Labour’s nightmare scenario”.
The NZ Herald began its front-page report: “Struggling Kiwis are in for even more pain after the Reserve Bank yesterday lifted the official cash rate by an unprecedented 75 basis points to 4.25%, forecasting a year-long recession. The hike pushed the OCR to its highest level in 14 years and is expected to tip fixed mortgage rates over 7%—causing some home loan payments to jump by over $8000 a year”.
The Herald went on to say that Reserve Bank governor Adrian Orr had urged Kiwis to “think harder about spending”.
Orr said inflation is nobody’s friend.
“To rid the country of inflation we need to reduce the level of spending in the economy. Think harder about saving rather than spending. Cool your jets”.
At that point Orr might have shouted across the road: “Can you hear me, Grant?”.
The Reserve Bank sees four consecutive quarters of negative GDP growth from June 2023 onwards. It also sees house prices falling 20% from peak to trough.
The 75-point move announced on Wednesday is a record increase, the previous largest having been 50 points.
Some experts see irony in the RBNZ’s tough talking, as it played a key role in the loose money regime while the Covid pandemic was at its height. That of course lit the fire of inflation which hit an annual rate of 7.3% in the June quarter and reduced only very slightly to 7.2% as of September. The central bank’s job is not being helped by a super-tight, red-hot labour market, with the unemployment rate just 3.3% as of September, while annual hourly private sector wages soared in the 12 months by 8.6% – beating all forecasts.
In the MPS, the RBNZ is forecasting annual inflation to rise again in the December quarter to 7.5% and stay at that level by the end of March 2023 before slowly dropping.
The RBNZ does not see inflation getting back into its 1% to 3% target range again till the September quarter in 2024. Another insight into how the NZ economy is performing—and how hard Robertson should toughen up on government spending—will come in Treasury’s fiscal update next month.
Meanwhile the NZ Herald’s political correspondent Thomas Coughlan offered a comment on the RBNZ’s performance on the day which should be absorbed both in the offices at 2 The Terrace and across the road in the Beehive: “The podium lacked the sobriety you’d expect from an institution that plans to strangle the economy of credit to the extent that unemployment rises to levels not seen in a decade. The fact that the Bank’s own mismanagement now means it has to move harder only adds to the sense of frustration”.