Reserve Bank (RBNZ) Governor Adrian Orr appeared before Parliament’s Finance and Expenditure Committee for the first time since the change in Government on Thursday morning.
The committee is now chaired by National Party MP Stuart Smith and has ex-Finance Minister Grant Robertson as the lead opposition member.
Because these committees are designed as a way for Parliament to scrutinise the Government, senior opposition MPs and backbenchers get to ask most of the questions.
Here are the three most interesting things the politicians and monetary policymakers discussed:
RBNZ is processing the GDP surprise
Governor Orr said the September gross domestic product (GDP) data was “surprisingly subdued” and had “significant” revisions to previous data releases.
“We are busily internalizing that complex situation and we will be back in February with our [next] Monetary Policy Statement”.
Before then, an “enormous amount of data” will be released, including employment and inflation, and baked into the central bank’s thinking.
Orr also said the RBNZ would pay attention to this afternoon’s Half Year Economic and Fiscal Update from Treasury, and the coalition Government’s mini-budget that will accompany it.
Paul Conway, the RBNZ’s chief economist, said that while historical headline GDP had been revised down, consumption and business investment were revised higher.
“You could associate that with an increase in migration,” he said.
When asked about the proposed tax cuts, Conway said they would boost economic demand if they're not fully funded.
“But it depends on how they are funded [and whether] government consumption has also been cut. So, how all of that plays out is exactly what we’ll be looking at”.
Mandate doesn’t change policy
Chlöe Swarbrick, a Green Party MP, asked what “tangible changes” would occur within the central bank as a result of the revised mandate.
Orr said it would create clarity in how the bank communicates its monetary policy, but wouldn’t change any of its work behind the scenes.
“The labour market, and concept of maximum sustainable employment, remain as important as always. Because it is one of the single largest factors in the supply side of the economy and the potential growth rate of the economy.”
“So, all of our work related to the labour market, and how it works … will remain as a continued focus.”
The Governor noted the remit still asks the bank to “have regard” to employment, output, and exchange rates. He also said the dual-mandate’s phrasing had always prioritised inflation.
Later, he said the RBNZ was “very committed” to flexible inflation targeting. The Act Party has proposed setting a specific time limit for getting inflation back to 2%.
“It is economically impossible to target a date and time to achieve consumer price inflation,” Orr told the committee.
“New Zealand tried that decades ago and we ended up with wage and price freezes and carless days and all sorts of things.”
Grant Robertson quipped: “It all comes back to Muldoon in the end”.
OCR should’ve been lifted slightly sooner
Orr said the Monetary Policy Committee did wish it had raised the Official Cash Rate earlier, but only by “one or two quarters, at most”. Increases started in October 2021.
This would have kept the inflation peak under 7% but not significantly, as the war in Ukraine would still have pushed import prices higher.
Underlying core inflation would be the challenge ahead, and much of that price pressure was coming from central and local governments.
“The last five yards of the inflation battle are going to be tough,” he said.
*You can also listen to Adrian Orr on a recent episode of our Of Interest Podcast here.
44 Comments
C/A deficit the worst it's ever been.
GDP already revised lower, on per capita basis the data is woeful.
RBNZ has a little wiggle room with NZD +~8% since late October.
Anecdotally, I expect retail sales to be dreadful this season.
I just can't see the OCR being increased. Markets are pricing in 100bps of cuts by Nov 2024.
Indeed. Central Bank paranoia at dropping rate to far, too soon, will likely be the theme. On the global scene, there are geopolitical risks brewing that could easily derail the fight to reduce inflation and consumption to mandated levels. It's a time to remain cautious.
I am not a supporter of the property market being used as an asset class. However, the downward pressures on the OCR eclipsed the upward risk in the last round of data. Add in to the mix that much of our CPI data has lag and I'd suggest that what is happening today in NZ is worse than the data suggests which would mean that OCR cuts, no matter how modest are likely to occur sooner than the RBNZ has being telling us. DGM, arguing any different in the face of the facts being published shows a significant bias. That bias might be better served championing mechanisms that would offset an OCR drop on the housing market rather than arguing down is up.
Tend to now agree. When you have governments whose policies actively encourage property speculation combined with mass immigration I don’t see any other outcome. Banks will do what they want to do regardless of RBNZ. NZ as a whole will suffer buts that’s not concerning to the so called “winners”.
Anyone ask them why the hell they were fighting themselves with the LSAP running way longer than it should have? That was terrible and led to huge profits from the banks.
Should have raised rates 1-2 quarters before they did. Why didn't they just respond to the data, you know, like they are supposed to?
Using QE to return reserves back to the banks has little effect on their profits as they cannot lend them out and bank margins and profits are now larger than when we had lower interest rates.
Banks Cannot And Do Not "Lend Out" Reserves, https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
But obviously LSAP now contribute to large profit because the short-term interest rate ( on settlement balances) have gone up. That way LSAP has contributed to bank profits ( only that effect )
In a very recent policy statement, Orr mentioned LSAP has given more buffer to absorb the new bonds which let the govt to run extra spending during pademic - but stilll their settlementbalances have not gone down ? why is that ?
Orr said the Monetary Policy Committee did wish it had raised the Official Cash Rate earlier, but only by “one or two quarters, at most”. Increases started in October 2021.
Two quarters would have been enough ...
... But most likely only if the initial few raises had been 0.5% rather than 0.25%.
Did any politician ask whether the RBNZ believed, with hindsight, a faster normalization would have helped?
No? Quelle surprise. (Or did they? And I'm being unfair.)
re ... “The last five yards of the inflation battle are going to be tough,”
I vehemently disagree with that statement if it is being used to justify holding the OCR higher than it needs to be for any length of time. (And that time, IMO, is fast approaching or already here!)
The last five yards always takes a while. Hold the OCR too high or for too long just to hammer the last tiny bit just increases the damage being done everywhere else where inflation isn't a problem. The OCR is a cruel and unjust bludgeoning weapon. It is a sledgehammer and should NOT be used for cracking nuts.
Central bankers 'overshoot' far too often chasing the last 5 yards. This needs to stop!
The OCR is the tool and works well precisely because we can all plan for its cycles.
Its human nature that we have booms and busts and every time we over shoot the boom we have to overshoot the process of engineering a bust, both to realign the economy (inflation from over consumption) and to solve the human issue (we are so used to borrowing to spend in the boom that as soon as tightening starts to work we want the good times back.. however it takes a couple years of pain to instill the opposite mentality in the poplace .. then to last for a few years before the next boom cycle.
When most humans lose the herd mentality associated with spending insanely at the end of a boom cycle (which will happen never) then we can have a smoothed out economy with no need of a hammer like the ocr to stop the up and down cycles getting too large or long.
For those who didnt overborrow and whoplanned for the inevitable downturn and this ocr tightening... now is as good a time to make money as the boom lol. And in a couple years after unemployment rises and the economy gets hard we will be ready for the next ocr drop and economic boom to start.
Replacing the OCR wouldnt work as we wouldnt all know whats coming.
Well put. Those that saw the inevitable change and planned accordingly will do well. Those that thought the speculative bender would continue forever with no hangover....will not.
But have another drink, it's makes the future upside for those that planned even better.
A fantastical bit of psycho-babble.
I await an invitation to peer review your paper justifying why we need an all powerful being to throw their weight around in the markets so that rich people like you can accumulate even more wealth by 'planning'.
Methinks it'll never get published.
But it'll go down a treat among pub economists.
So he sh*ts the bed with Labour, tells everyone it's just transitory, gets a lot of young families starting out to take on massive debt, then jacks the rate sky high to overcompensate for his own fkup, and now saying his fkup is too hard to fix, can't even put a date to achieve the target he was hired to achieve... why isn't he fired yet?
Last Govt has left a fiscal mess. Options...
Do nothing keep printing and become New Zimbabwe. Educated youth keep exporting themselves replaced with 501s in return
Force financial austerity on workers via importing low wage workers and higher unemployment. This seems to be the last Govts plan which, for a Labour Govt, seems bonkers. https://www.stuff.co.nz/business/301029438/record-level-of-employers-lo….
Or allow the ponzi to pop and the associated lower cost of living wash over all aspects in society. Banks and specuvestor's will complain bitterly about their "paper" losses though.
Our two main political forces ultimately want stability above all else. This is evidenced by the fact that they operate about 98% the same, and have a handful of counter policies, to give some illusion to the demographic that there is choice.
They don't want any bubbles popping, because the aftermath will be extremely unpopular.
Three key take-outs from me:
- Economists have complete faith in models that are literally terrible at modeling - blind faith trumps evidence every time
- RBNZ still think that the solution to house prices is a big boost to supply. But the market has zero interest in providing excess supply - why would they?
- Politicians ask dumb questions - they need better advisors. For example, "Are there better ways to manage an import price shock than reducing household disposable income, protecting rich peoples' savings, adding billions of cost to businesses, and telling Govt to slow down investment in things we need?
What concerns me is they seem to be right about nothing. There predictions are constantly on the wrong side. Unemployment is on the rise, rapidly and the country is going backwards at a rate of knots. Prediction is Orr has cooked us and will be reigning it in come may 2024
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