Former bank boss implores Orr not to hike OCR: 'World of pain'
Tuesday, 23 May 2023
Reserve Bank Governor Adrian Orr is expected to announce an increase to the official cash rate (OCR) on Wednesday – but one former bank boss has pleaded with him not to.
The official cash rate is at 5.25% but is widely expected to increase to at least 5.5% and possibly 5.75%, in part because of a higher level of Government spending than expected in the Budget, and soaring inflation.
As well as the decision that is made on Wednesday, commentators will be looking at the forward track the Reserve Bank forecasts – indicating where it expects the OCR to go from here.
But David Cunningham, chief executive of mortgage broking firm Squirrel, and former chief executive of The Co-Operative Bank, has written an open letter to Orr, in which he said an increase was not needed.
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He said New Zealand households were already feeling mortgage pain and it would get worse, even without OCR increases.
“Even if the OCR is held at current levels, the average mortgage rate Kiwis are paying is going to rise to 5.9% over the next year as more people roll off lower fixed mortgage rates to higher levels. That’s another 1.5% to find on top of where we are now… households are in for a world of pain.”
Migration would help the Reserve Bank, rather than hinder it, he said. The Reserve Bank had said it wanted to push unemployment up to 5% to help bring inflation under control.
“And, to me, that’s where migration comes in. Bringing the tens of thousands of workers to fill vacancies businesses so desperately need filled, and helping to take the heat out of wage pressure.”
He said the demand pressure that migrants would put on the economy through higher spending would be negligible.
“In short, my view is that the surge in migrants will see unemployment rise – but it won’t take Kiwi losing jobs (as was the Reserve Bank’s original plan). Rather it’ll happen as a result of a bigger labour supply, which will be a drag on inflation.”
He said, if it were up to him, he would hold the OCR at 5.25% and make it clear that the rate was unlikely to drop this year.
“That will ensure the tightening monetary conditions for households are delivered, and see wholesale interest rates revert to the level they were after the April OCR review.”
He said the Reserve Bank should not kill the economy or inflict more pain on top of what was already coming, just to tame inflation a little faster. “I believe it’s now time for you to watch, worry and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door.”
BNZ said the decision-making process for the Reserve Bank was not getting easier.
Head of research Stephen Toplis said, since the decision to increase the rate by 50 basis points in April, there had been data suggesting such an increase was not necessary – but also developments suggesting inflationary pressure could be higher than the Reserve Bank had anticipated then.
He said, at the time, the Reserve Bank made it clear that it was worried about market weakness leading to lower retail interest rates.
But the big increase had further inverted the yield curve – making longer-term rates cheaper than short-term fixes.
When markets think the Reserve Bank has gone too far with interest rate hikes and as a result is likely to have to unwind more quickly, it can have the opposite effect of what was intended because they price in cuts on longer-term rates.
“In large part, the Reserve Bank’s next move is highly likely to be heavily influenced by its assumptions around the relative supply and demand impacts of a net migration inflow that is much stronger than anyone believed.
“There is, of course, some irony in this. The theme of the day for some time now has been how do we increase the supply of people to contain the inflation that is being driven by an excessively tight labour market? We appear to be achieving this in spades.”
Toplis said the Reserve Bank could interpret the data as meaning it did not need to tighten rates at all – or that a 50bps increase was needed. He said his expectation was a 25bps lift.
“At the same time, we expect the bank to water down any thought that rates could fall any time soon by printing a rate track with no decline in rates until well into 2024.”
ASB chief economist Nick Tuffley picked a 50bps increase, and said that was likely to be the peak.
At Westpac, the economists expect a 6% peak but said whether the Reserve Bank settled on a 25bps lift or 50bps on Wednesday would depend on whether it agreed.