Kiwibank chief economist Jarrod Kerr says households and businesses don't need rate hikes to dampen demand against the backdrop of an oil shock

Kiwibank chief economist Jarrod Kerr says Reserve Bank Official Cash Rate (OCR) increases would be "reckless and unwarranted" because households and businesses don't need higher interest rates to dampen their demand for goods and services against the backdrop of the Middle East crisis and an oil shock.

In conversation with fellow Kiwibank economist Alexandra Turcu, Kerr notes ANZ, "New Zealand's largest bank, the blue Teletubby," is now forecasting three OCR increases between July and October, lifting the OCR to 3% from 2.25%.

"I just really struggle to see how the Reserve Bank would have seen enough data and assess that data as being highly inflationary in order to to hike as early as July. I mean, we don't even have the second quarter CPI report when they meet in July."

The Reserve Bank has a 1% to 3% inflation target range based on Statistics NZ's Consumers Price Index (CPI). In the December quarter the annual CPI rate was 3.1%. March quarter CPI is due out on April 21. June quarter CPI is due on July 21, 13 days after the Reserve Bank's July 8 Monetary Policy Review.

Kerr also says increasing the OCR in all of the July, September and October monetary policy reviews, as forecast by ANZ, would mean three hikes in the run-up to the November 7 election. 

"That's punchy as well. I wouldn't want to be National going into an election where your economy's been hit for basically the last three years, and then you've had interest rates hiked three times into the election," Kerr says.

"A lot of Kiwis don't know that the central bank's independent, or a lot of Kiwis listen to what politicians say around interest rates and think that the politicians set the interest rates. So to have three rate hikes into the election's not going to help National at all. So I don't think they'd be too much of a fan of that."

"Obviously the central bank is independent. Obviously the central bank needs to do what they think they need to do. But I just don't think that they will know precisely what to do this side of the election, which is why we're still sticking to our call that thoughts of rate hikes, like they're in the distance. We've got to figure out what's going on first," says Kerr.

Whilst acknowledging an inflation shock in underway, against the backdrop of high fuel prices, Kerr thinks it's temporary.

"But we're not going to be able to assess that in the next three or four months, in my opinion. We need to see inflation expectations spike. We need to see businesses passing on these costs. And I just don't think that's happening."

Turcu notes the Reserve Bank will also be watching for signs of wage inflation.

"Which, in my opinion at least, we're not going to be seeing that skyrocket anytime soon," says Turcu.

The Kiwibank economists argue that, with the Middle East war not over yet, we don’t know when it will end. And even when it does, things will likely take months to return to normal.

"The real threat that remains, is the risk of a true knockout punch, that would come from a domestic fuel shortage. The heightened uncertainty is causing businesses and households to bunker down. Raising interest rates is tone deaf, and potentially reckless. Both businesses and households are struggling with increased costs, not surging demand."

"Any rise in the costs of essentials will feed into inflation short term, but cost increases will push demand down and put downward pressure on growth. We are likely to see a contraction in economic activity in the current quarter. And we won’t see this played out in the data for months to come. second quarter CPI isn’t out until July, after the Reserve Bank’s decision, and to know if inflation sticks around we really need to see third quarter data at the very least," the Kiwibank economists say.

"In our view, the Reserve Bank’s best course of action is to watch, wait, and weigh up the facts once they have the information in front of them. Households and businesses who’ve already seen their costs rise don’t need a rise in interest rates to dampen their demand – because this is not a demand story, this is not Covid. Raising interest rates risks a repeat of past mistakes, potentially inducing a recession. It could be reckless."