Bitter medicine for NZ economy:is it a poison pill for Ardern administration?

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”.

One thought on “Bitter medicine for NZ economy:is it a poison pill for Ardern administration?

  1. Consider what the projected 130000 unemployed means. That is a population that if a city would be our 6th largest. It will be primarily women, lower skilled
    and non-pakeha workers; it will be parents; it will mean increased benefit costs, increased health costs, increased welfare state spending; a big jump in “child poverty” which as we know is weasel words for family poverty. This is an intergenerational tragedy.


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