'It's the perception and the fear': How Official Cash Rate decisions can influence the optics of an election

While the choice to hike the Official Cash Rate (OCR) can be justified economically, how these decisions are perceived can be a problem in an election year, a former Minister says.

On Wednesday, the Reserve Bank (RBNZ) increased the OCR for the first time since May 2023. Going from 2.25% to 2.50%, the RBNZ said: “With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target midpoint.”

Former Minister Peter Dunne told interest.co.nz that the question we don’t have a clear answer to is whether the public will perceive the change as an economic correction or a dampening down of growth and potentially of confidence “which means the tough times continue a little longer, the mortgage goes up, all those sorts of things”.

“Whether that happens, in a way, doesn't matter. It’s the perception and the fear, particularly four months out from an election.”

And with the prospect of more rises before the end of the year, Dunne said it was no surprise that Finance Minister Nicola Willis had gone on the front foot, saying it was a vote of confidence in the economy and its growth.

“She’s got to sell that message now. She can't afford any sort of sense that we're going back to where we were in the early 2020s when the bank was raising interest rates and people were struggling, so it's going to be a finely balanced thing,” he said.

There was a “relaxed air” that the Beehive conveyed on Wednesday, Dunne said, but “they’ll be quite concerned behind the scenes about what the impact of this might be, and they’ll be looking for early polling data, I would suspect, on just how people are receiving this.”

The Government’s message at the moment has been that New Zealand had “turned the corner” and while there was conflict in the Middle East, things were “back on track,” he said.

“That could be a good narrative going into the election but if that gets derailed or if people feel … that's not quite right, it could really bounce back on them very badly.”

“They'll be keen to assert the independence of the bank … But they'll be watching this very closely over the next few weeks, just to see how the public have taken it,” he said.

Opposition parties would be watching this from the other side of the coin, Dunne said. “Is this going to be advantageous to us? And if it is, how do we capitalise on that?”

‘You wouldn’t rule out an October pause’

The next OCR Monetary Policy Statement will be on September 2. A review is also set for October 28, a week before election day but also when advance voting has already started.

Following the OCR hike, BNZ head of research Stephen Toplis said “we feel that a further 25-point increase in September is very close to a done deal” and that there needed to be follow-through in at least one of the October and December meetings.

“The central bank shouldn’t take the General Election into consideration in making its decision but you wouldn’t rule out an October pause.”

Toplis said: “Many months ago, when we thought that the central bank would not be raising interest rates until later this year … because we thought the first rate increase would be September, October…We did pass comment that we didn't think that they would want to start a tightening cycle weeks before an election, because they would get heavily embroiled in the political process.”

“It would become politicised.”

This time, it could be quite different, Toplis said.

If by the time of the September announcement, the RBNZ had delivered two rate hikes and indicated they needed to carry on, “then I think everybody would have got their heads around that, and it would be completely depoliticised anyway,” he said.

“From our perspective, it’s no big deal at all. All we’re saying is that we think interest rates should rise at consecutive meetings, but if the Reserve Bank chose to have a wee pause around election time, we wouldn’t find that at all upsetting.”

Wider decision-making at RBNZ

Dunne said that previous decisions on the OCR were the responsibility of the Governor alone, and the Governor of the day took the blame or the credit, but with a Monetary Policy Committee, people get a sense of where the lines are drawn.

“It’s a little harder to blame the Governor for everything,” he said, and because of that wider involvement in OCR decisions, that may mean the chances of big upheavals are less than they were previously.

While people understood the RBNZ was independent and made its own decisions, they also will feel that the Government has some sort of involvement, he said.

“Therefore, if the bank puts rates up, that’s obviously a sign that the Government is not doing as well as it should and if things are as good as they say they are, why haven’t they stopped? This will be that sort of feeling that occurs.”

Election on a knife-edge

Not everyone followed the RBNZ’s decisions, Massey University politics professor Richard Shaw said. “As far as New Zealanders are concerned, it’s all the government. I think that would be the dominant position.”

“Most voters are not going to be going into the pros and cons of central bank independence or whether or not there should be a dual mandate … It’s all really ‘who’s doing this to me, it’s the government, and I feel worse’. Or in the case of savers, ‘I feel better’.”

If the RBNZ held the OCR in October, he said that would be “really handy” for Willis. “That'll be the one to look for, I reckon.”

“This is going to be a serious knife-edge election … There will be enough people who haven't made up their mind going into the early voting period and election day itself to mean that there's no way the election will have been decided, and we can't tell, of course, until after the event what factors influence it, but it would be pretty hard to say sensibly that the decision that's announced on October 28 will have no impact on voting behaviour, because it will.”

“It'll have some impact. It's just really hard to pull it out of everything else,” Shaw said.

Victoria University of Wellington senior lecturer Tom Jamieson said it was well-established that people evaluate the performance of the incumbent government based on the state of the economy at the time of the election.

“If you're feeling like things are going pretty well and you're inclined to also think that it's the government that's responsible for that situation, then you're likely to reward them. On the other hand … if you perceive things are going worse for you than they were three years ago, then that might play a role.”