Cyclone Gabrielle: will Adrian Orr row to economy's rescue?

Friday, 17 February 2023

The Reserve Bank could raise the official cash rate by 75 basis, leave it alone, or do anything in between, economists believe.

Before the cyclone, Reserve Bank governor Adrian Orr might have felt he could just start to relax, even if he might not have thought it was safe to show it.

It was early days, but the economic indicators were finally starting to stick to script.

Inflation was looking a tiny bit tamer and the jobs market was cooling a fraction.

Economists felt the Reserve Bank faced a choice between acting tough and twisting the knife in the back of inflation by hiking the official cash rate by 75 basis points to 5%, or easing back on the brakes by “only” raising the rate by 50bp.

* Inflation will be harder to bring down than markets think

* Government accounts in 'good shape' to meet cyclone challenges despite debt rise

Orr acknowledged in November that the Reserve Bank was raising interest rates to try and engineer a recession, but the question may now be whether he can leave that to the cyclone.

Commander of the HMNZS Manawanui, Yvonne Gray, speaks about bringing supplies to Tairāwhiti Gisborne and remote settlements on the East Coast.

Either way, bets are off on what the Reserve Bank will do when it releases its next monetary policy statement on Wednesday.

Economic forecaster Capital Economics is predicting the Reserve Bank will stick to the 75 basis point raise it signalled in November, which would take the official cash rate to 5%.

ANZ chief economist Sharon Zollner is forecasting a 50bp rise, but isn’t ruling out the central bank postponing a rate raise altogether.

Finance Minister Grant Robertson has dangled the prospect of meaningful financial support for those affected by the floods, saying the Government is committed to “continuing to support them through these difficult times”.

That raises the prospect that fiscal and monetary policy could begin pulling in different directions, at least in some parts of the country.

ANZ points out the dilemma for the Reserve Bank is that the cyclone has delivered a supply-side shock to the economy that is likely to increase inflation in both the short and medium term while also reducing the chances of any economic growth in the first half of this year.

It expects the cyclone to push up the price of food, both immediately but also potentially for “decades” as a result of damage to topsoil in Hawke’s Bay.

Rents are likely to rise as people abandon flooded homes, construction costs should go up as the rebuild worsens shortages of skills and materials, and the price of household goods and furnishings may spike more temporarily as people replace furnishings and appliances lost in the floods.

Robertson looked on the bright on Thursday when he said insurance would cover “significant elements” of the cyclone damage.

But ANZ expects insurance costs to rise as a result.

The lesson learnt from rising premiums in the wake of the Canterbury earthquakes was that insurance doesn’t permanently offload the bill for natural disasters to insurance conglomerates and faceless reinsurers, it only spreads the bill, between Kiwis and over time.

Kiwibank chief economist Jarrod Kerr believes the costs of the floods so far this year will add up to about $10 billion.

He says that is just “a very rough stab in the dark”, but also says the bank believes it is being “conservative”.

“We're hearing insurance claims for the Auckland flood alone are getting close to $1b and insurance with regard to the cyclone is going to be multiples of that.”

Revenue is being lost from the closure of businesses and the loss tourism “and then there's the devastation; the farms, the vineyards, there's millions and millions of dollars of destruction”, he says.

Kiwibank chief economist Jarrod Kerr believes his “rough stab” that the cyclone will cost $10 billion is “conservative”.

Like Robertson, ANZ isn’t attempting to guess the likely cost of the cyclone.

But it isn’t shying away from making some comparisons with the Christchurch earthquake – which the Insurance Council estimates resulted in economic losses of more than $40 billion – saying it will be “very significant for New Zealand”.

Those costs will depend on whether and how communities and infrastructure-owners build back.

National grid operator Transpower is understood to be already pondering whether it rebuilds its crippled Redclyffe substation in Napier in the same place after it was flooded on Tuesday.

But that is just one of a sea of tough decisions ahead.

Insurance Council chief executive Tim Grafton says “massive and sustained investment” will be needed to get infrastructure up to spec in the face of climate change.

“Houses are built to last 50 years or more. It is time to draw a very clear line in the sand and not consent to build in dumb places and in a way that can’t cope with what’s to come.

“Now is the moment to reset and ask questions about whether to rebuild in some locations and if we do how to rebuild better to better protect ourselves.”

Like ANZ, Infometrics sees the cyclone tipping the Reserve Bank away from a 75bp and towards a 50bp raise.

Its view is that inflation is not really under control yet, but that in choosing a smaller rate rise, the bank will be “mindful of the optics of heaping more pain on affected households”.

“It’s an uncomfortable balance.”

ASB chief economist Nick Tuffley says it expects the Reserve Bank to “look through” – in other words disregard – the inflationary impacts of the storms in opting for a 50bp raise.

BNZ research head Stephen Toplis is on the same page and says that while it expects a 50bp rate rise, in its view, it is conceivable the Reserve Bank has already done enough to tighten monetary policy.

“In particular, it is worth noting that a significant proportion of past tightening is still to hit mortgage holders’ cash flows. It will, in due course.”

Kiwibank’s Kerr goes far further.

“I honestly don't know how you explain and communicate a substantial rate hike in the middle of a national emergency,” he says.

But if most economists are right, we will find that out on Wednesday.