Raising interest rates at a time like this? Shamubeel calls bullshit

The Reserve Bank has signalled an imminent lift in the official rate. Economist Shamubeel Eaqub is not impressed.

A fortnight from today, the clock strikes OCR at the Reserve Bank and it’s time to announce any change to the benchmark interest rate. The last time it put its mind to that task, on the eve of Budget Day in late May, the official rate was held at 2.25%, but the bank’s committee was split down the middle, with half saying it should bump up to 2.5%. It took the casting vote of governor Anna Breman to stave that off.

The bank’s monetary policy statement came with a telling nod of the head, however: there would be a number of rate rises to come this year, and the OCR would probably hit 3% by early 2027. As per its statutory mandate, the Reserve Bank expected to take action by lifting rates to keep a lid on inflation.

“And I think they’re wrong,” said Shamubeel Eaqub, speaking on a new episode of the Spinoff podcast At Large with Toby Manhire. Asked to reprise the “Shamubeel calls bullshit” series he produced with the Spinoff back in 2016, Eaqub said: “Look, I think the big one that worries me at the moment is a central bank that wants to raise interest rates in the middle of the supply side shock. So if there’s one thing I’d like to call bullshit on right now it’s we have monetary policy that is no longer fit for purpose.”

The blunt instrument of pushing up rates to stymie inflation didn’t in the current circumstances make sense, said Eaqub, chief economist for Simplicity. “The economy is too weak. There is no evidence that there is a wage-price spiral. People are lucky if they can get a job. People are lucky if they can get a wage increase. An increase in interest rates today would derail the very, very fragile state of this economy. And I’d hate to see us repeating the mistakes we made during the GFC.”

It was frustrating, he said, that it so often felt like managing inflation had to come at the expense of jobs. “Yes, we have inflation, but most of the inflation we’re experiencing at the moment is not because we are consuming too much of this stuff. Your rates aren’t going up because you’re consuming too much rubbish or whatever, right? Your electricity isn’t going up because you’re buying much more electricity, or your insurance. I think we have to understand the current state of inflation is quite different. It’s a demand-destruction type of inflation. It’s making people poor, and if we hurt people even more with rising interest rates now, I think it’s going to be a very damaging thing to do.”

The bank should bear in mind, said Eaqub, that it is ”mandated with keeping inflation low in the medium term, not today. And the question is, can you look out two years and say we’re going to have this big problem with inflation because of what’s happening today? I’m very, very sceptical.”

In the podcast episode, Eaqub addresses the state of the New Zealand economy, the greenness of the shoots, its resilience in the face of a volatile world, and the latest proposals from the National Party to reform KiwiSaver.

To get every episode of At Large with Toby Manhire in your podcast feed, follow here for Spotify, or here for Apple. If you’re YouTube-minded, you can subscribe to the Spinoff here and find all the episodes here.