'Significant risk' Reserve Bank causes more pain than necessary with OCR move

Wednesday, 23 November 2022

Reserve Bank Governor Adrian Orr discusses lifting the OCR by 75 basis points to 4.25%.

Debate is beginning to build over whether the Reserve Bank may have gone too far in its scramble to hose down stubborn inflation.

The Reserve Bank raised the official cash rate by 75 basis points to 4.25% on Wednesday but surprised economists by forecasting the rate would peak at 5.5% next year, while also predicting a further rise in inflation and a year-long recession.

ASB chief economist Nick Tuffley described the central bank’s latest monetary policy statement as “very hawkish”, noting it had discussed the option of a 100bp hike.

ANZ chief economist Sharon Zollner also said the Reserve Bank’s statement had been “even more hawkish than we expected”.

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Reserve Bank governor Adrian Orr closed a media conference on its latest monetary policy statement by pointedly wishing everyone a 'wonderful and sensibly spending Christmas'.

John Carran, an investment strategist and economist at broker Jarden, said there was a significant risk the Reserve Bank caused more economic pain than necessary.

Reserve Bank governor Adrian Orr said the bank’s monetary policy committee, which he chairs, agreed the official cash rate (OCR) needed to reach a higher level to ensure inflation returned to within its target range of 1% to 3%.

Annual inflation was last measured by Stats NZ at 7.2% and the Reserve Bank is forecasting it will rise still higher, to 7.5% in the December and March quarters.

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But Carran said the bank might be too “backward looking”, given the lag between interest rates rising and that fully hitting home on the economy.

The Reserve Bank appeared to be giving low weight to “clear signs global inflation pressures are easing”, with sustained falls in commodity prices and shipping costs, he said.

“There is a significant risk the Reserve Bank over-tightens monetary policy causing more economic pain than is necessary to sufficiently control inflation over the medium-term.”

Westpac acting chief economist Michael Gordon also queried whether interest rates needed to rise as high as the Reserve Bank is now forecasting.

Westpac was still forecasting the OCR would peak at 5%.

“In our view this remains sufficient to bring inflation under control,” Gordon said.

BNZ research head Stephen Toplis said before Wednesday’s announcement that if was up to BNZ, it would have only raised the OCR by 50 basis points.

The Reserve Bank implied in its last monetary policy statement in August that the official cash rate (OCR) would peak far lower, at 4%, and would remain at that level next year and throughout 2024.

But its new forecast implies the OCR will reach 5.5% by the middle of next year and stay at that level for about 15 months before starting to decline.

Inflation and unemployment have barely budged since its previous monetary policy statement in August, but Orr said the fact high inflation had lasted longer increased the risk it would become “embedded”.

The bank had no alternative but to actively reduce demand in the economy, he said, closing off a media conference on the hawkish monetary policy statement by wishing everyone a “safe and sensibly spending Christmas”.

The Reserve Bank is forecasting a “shallow recession” with four consecutive quarters of mild GDP decline, commencing in the three months to the end of June, and another six months of zero growth after that.

It predicted the economy would contract by a total of 1% over that period.

National Party finance spokesperson Nicola Willis said it was ominous the Reserve Bank was “not only forecasting a year-long recession, but it believes inflation has not peaked, and will still be higher at the start of next year than it is now”.

“This spells yet more worry for the growing group of Kiwis being kept up at night concerned about the growing size of their mortgage payments,” she said.

Council of Trade Unions economist Craig Renney said there was a chance that the Reserve Bank was talking up how bad things were going to get as a way to slow the economy and do some of the work that interest rates would otherwise have to do.

But he voiced concern over the impact on recent home-buyers and young people, saying “the pain of what lay ahead” for the economy would be highly unevenly distributed.

“If you’ve recently purchased a home or you’re about to come off a very low fixed-term rate on your mortgage you are about to feel it. If you have debt that has a variable interest rate of any sort you’re about to feel it.

“Younger people tended to have more debt. Older people with more assets or money in the bank might actually benefit from the higher interest rates.”