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TOP leader Raf Manji argues the RBNZ shouldn't overcook its response to inflation, as it overcooked its response to Covid-19

Public Policy / news
TOP leader Raf Manji argues the RBNZ shouldn't overcook its response to inflation, as it overcooked its response to Covid-19
Raf Manji

The Opportunities Party (TOP) leader Raf Manji worries interest rate hikes will only go so far in curbing inflation.

In fact, he believes the Reserve Bank (RBNZ) will struggle to lift the Official Rate Cash (OCR) above around 2%, as the pinch would be too much for mortgage holders, and thus the wider economy, to handle. 

When the RBNZ last week lifted the OCR from 1% to 1.5%, it suggested the rate could cap out at around 3.4% in this tightening cycle. 

Markets had been pricing in a higher terminal rate of over 4%, so interpreted the RBNZ’s big 50-point hike as a relatively dovish move. 

While bank economists are forecasting the RBNZ to go large again at its next review on May 25, and hike the OCR by another 50 points, Manji told interest.co.nz he believed the central bank should hold off for three to six months and assess the impacts of last week’s hike first. 

The former investment banker believed the RBNZ was behind the curve, and should’ve raised the OCR by 50 points in February. But he was of the view there are limits to the effectiveness of higher rates in reducing inflation in the current environment. 

He recognised suppressing economic demand via too high an OCR wouldn’t address two of the key drivers of high prices - supply chain hold-ups caused by Covid-19 and high oil prices caused by Russia’s invasion of Ukraine. 

Manji was also in the “high inflation is transitory” camp.

“I don’t think it’ll be a permanent, non-stop inflationary environment, because I think we’ll adjust to it,” he said, suggesting New Zealand strengthens its security of energy supply by increasing capacity to generate more energy domestically, for example.

Manji also noted how the RBNZ has struggled to raise the OCR above around 2% over the past decade. 

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Manji argued the Government had to do more to address inflation and soften its impacts on low-income households. He worried hiking the OCR too aggressively would be the wrong response to the problem. 

He made a similar call about the effectiveness of monetary policy at the start of the pandemic, when he argued that providing financial markets with a lot of liquidity by doing quantitative easing was the wrong response. He said we weren’t facing a financial crisis, but rather a situation where the economy was being switched off and then on again to prevent the spread of a virus.

He noted governments have more policy levers at their disposal than central banks, which have blunt instruments like interest rates. 

“The Government has to learn to use different tools, and learn not to rely on interest rates. Interest rates are a huge issue in the pricing of assets,” Manji said. 

“We’ve seen already overseas, bond curves are inverted all over the place, because markets are already saying, ‘If they whack interest rates up, that’s going to cause huge problems. Prices are going to come down.’”

Manji suggested the Government should seek to ease the pain of inflation by breaking up the supermarket duopoly. The Government has made noises about doing so, but is yet to act on a Commerce Commission market study into the sector. 

He was unsupportive of its decision to cut fuel taxes for three months, because of the counterproductive signal it sent on the climate front. He was however supportive of the Government temporarily halving public transport fares, suggesting it should subsidise fares more, permanently. 

Manji believed central government could also shave GST from local council rates to alleviate pressure local councils are under to lift rates. 

He believed TOP’s call for a universal basic income, coupled with a change in the tax system to better redistribute wealth, would support households struggling to make ends meet. 

Asked whether he believed it was politically practical for government (fiscal) policy to be as nimble as he suggested it should be in addressing macroeconomic issues that have to date largely been pawned off to public servants at the RBNZ, Manji said, “That’s a question for the citizens and voters.”

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77 Comments

No one is saying aloud that the RBNZ should not have cut OCR by 75 bps points in 2020.

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21

What would happen if the RBNZ didn't tinker with any levers, set everything to neutral and let nature run it's course.  Would this inflict less carnage on the populous in the long term? 

 

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3

This is why TOP are a joke, it is obvious they are going over 2.

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Yes, they are utterly ridiculous. 

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And still less ridiculous than Labour, Greens, Nats, Act... 

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5

I will dispel any rumour mongering right now - I am NOT Raj!!!

However, I obviously totally agree with him!

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6

But are you Raf? 

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6

Haha nice.

I will leave my typo in to retain your comment’s meaning.

obviously I meant Raf!

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4

No mistake you do not write and comment like Raf. Before he entered local politics he commented here frequently.

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We will have to take your word for it.  

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In fact, [Manji] believes the Reserve Bank (RBNZ) will struggle to lift the Official Rate Cash (OCR) above around 2%, as the pinch would be too much for mortgage holders, and thus the wider economy, to handle.

Going against the predictions of just about every economist in the country is a brave call, especially by someone trying to establish themselves as party leader on the cusp of a new election cycle. Manji has apparently fallen victim to the misconception that the RBNZ is somehow hamstrung by the immense amout of debt which people have chosen to take on, and therefore cannot fulfill their mandates through monetary policy tools since that would result in mortgage holders having to bear the consequences of their own decisions, which is for some reason considered unthinkable.

As for the rest of his comments, I largely agree.

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12

I agree. As a risk averse individual I chose not to take part in the housing frenzy or spend my equity on a boat or a spa pool. We have to take the consequences of our choices. I have little sympathy for those that over extended, other than the first home buyers who were duped into over paying, I feel really sorry for them.

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22

How were FHBs duped?

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1

Those that haven't purchase yet face massive mortgages with the risk of rising interest rates.

Those that purchased in 2021 risk prices falling, negative equity and the risk of rising interest rates.

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13

I don’t see how this proves they were duped. 

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3

"Those that haven't purchase yet face massive mortgages with the risk of rising interest rates" 

BUT they havent purchased ?

Despite this the new  mortages would be lower than present by end of rate rising cycle.

 

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"Those that haven't purchase yet face massive mortgages with the risk of rising interest rates" 

BUT they havent purchased ?

Despite this the new  mortages would be lower than present by end of rate rising cycle

 

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The PM/Finance Minister gave comment that house prices, ideally, would only increase in small amounts. As opposed to the wholesale drop in values that the RBNZ basically longed against the NZ balance sheet by slashing interest rates. Politically, institutionally, every indication was there, subliminal and superliminal, that house prices would stay level and the country would do what it takes to make it happen. 

The deal has apparently changed. I can't wait to see a journalist ask if Ardern considers herself to have failed, given her previous comments about wanting to avoid house price drops. 

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3

Yes but people also don’t want to pay $4 a litre for gas. So a bit of a predicament our leaders face….

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Low interest rates tempted them in. Media commentators all said the price rises would continue and were very late to report a slowing market or warn against over extending. I am old enough to have seen high interest rates and crashes in UK and Ireland. Many young people in NZ were convinced that property was a one way bet.

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I brought a spa pool with cash.

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Where did you bring it from? Spas are very heavy to carry

 

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My guess is he forgot to capitalise the C. He brought it with Cash - Johnny Cash, who by all accounts was quite strong.

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8

When the man comes around...he brings the spa.

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Sensible. Nothing wrong with a spa pool or a boat if you can afford it. Just don’t bet your house on it. 

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Totally agree chebbo and WH.

I don't understand why taking GST of rates is any different or better than cutting excise tax on fuel.

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GST on rates is a tax on a tax: a central-government tax on a local-body tax. Removing the GST becomes a gift by central government to local bodies (which can increase rates to swallow the saved GST). Whether that is good or bad is a matter for debate.

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Manji seems unaware that mortgage rates are influenced by international swap rates as Bank don,t borrow OCR variable and lend fixed. With this kind of knowledge deficit Manji's opinion is worth less than a bar of soap.

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He was right about not dropping rates and he is right about not hiking them. Monetary policy is impotent when faced with supply-side inflation, or pandemic-driven reductions in demand for goods and services.  

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But we did drop rates and now central banks have created a series of unintended consequences that will cause pain for somebody/group (or perhaps everyone) within the economy. No free lunches.

I think central bankers tend to be driven by doing what is the politically popular thing to do....and right now, it would appear that is becoming more about fighting inflation, than preventing asset prices from falling/preventing recession.

I'm not making a prediction as to what they will do as they have already surprised me with the severity of their actions...but with that in mind, it wouldn't surprise me if they fight inflation strongly with little consideration for growth/asset prices.

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Yes, RBNZ did drop rates. My view, as I think we have discussed before, is that RBNZ are talking big about future rate increases to push market / mortgage rates up so that they do the heavy lifting on reducing consumer demand in the economy (in the misguided hope that this will reduce prices). RBNZ will then increase the OCR to around 2%. If RBNZ have any sense, they will then announce that they are going to leave it there for the next 12 - 24 months. As we have seen in the last two years, if you want to stimulate the real economy (jobs, business expansion etc), it is fiscal spending that works - so go for major subsidies on solar panels, public transport expansion, flood defences, etc.  

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Exactly. 
It was wrong to drop the OCR to nearly zero - with nasty consequences.

similarly it will be wrong to hike aggressively.

but they probably will…

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Why don't they ever ask these interviewees about the consistently high non-tradeables component of inflation in New Zealand?

To me the understated impact is the potential price/wage spiral, where the C.P.I. will now be used as a basis for wage/salary/contracted hour negotiations etc. 

Also the Ukraine Invasion was 24th of February 2022, and is regularly wheeled out as a justification for increased oil prices.  Surely the March 2022 quarter impact (effectively a month) is quite minimal, (and it's also mitigated by the fuel tax reduction). 

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9

As of recently that wage growth just isn’t occurring though. 

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3

I just raised all my staff's wages, to match inflation from the 1st of April (and I also raised the wages 5% the previous year)

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Yeah but your staff don’t represent the entire  nz working population. 

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Must be a high profit margin industry to be able to do this.

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I don't believe external pressures will ease just because of nzs large central bank generated mortgage bubble . The reserve bank  is not supposed to take that into account either they are supposed to contain inflation within the band given . If that means lifting rates then lift they will . They will be governed by what occurs offshore as the pressures on our currency also may negatively impact internal inflation. 

 

 

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Inflation will be higher going forward. For the last 20 years, the goods component (1/3) of inflation was effectively 0%. The only inflation came from services (2/3), strongly tied to wages.  So baseline inflation should be 50% higher as goods now contributes to inflation. This overall higher inflation rate, will push up wages and subsequently services inflation. I would anticipate base inflation will be 50 to 75% than it has averaged over the previous 10 years. 

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If the prices of imported foods/services continue to increase, won’t the RBNZ have no choice but to continue increasing interests rates to maintain the purchasing power of the NZD? 

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They do have to align themselves somewhat with other central banks decisions / policy or risk big unwanted shifts in the nz dollar.  
This is what so many commenting on this site overlook when criticising many of the RBNZ’s moves.   Their job is a real balancing act. 

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Exactly!  Among several rocks and a hard place is the Central Banker’s natural habitat.

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I would love an interviewer to ask any of these interviewees to define 'transitory'.

Is it a month/a year/.....a decade?

Was reading today that the Ukraine/Russia War situation could bog down into a more drawn out, stagnant war type situation...hardly sounds transitory.

Also China's zero Covid policy is hardly 'transitory' by definition. 

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What is TOP polling at again?

 

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interest.co.nz sure does love TOP

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Study their policies and so will you. 

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11

Not sure you'll convince a landlord/speculator type that TOPs policies are good for them.. because they really aren't.

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Soon to be landlord and I voted TOP the last two elections. What's good for me personally is not the same as what's good for the country.

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Most vote their own wallet.

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Whilst Raf makes some valid points, his view that "he believed the central bank should hold off for three to six months and assess the impacts of last week’s hike first" is very dangerous in my opinion.

We are still at a stage where many expect (or maybe hope) that a soft landing can be achieved, I don't believe so.  Inflation is far too high to be ignored, interest rates will go up to combat inflation and there is far too much debt for said rise in interest rates, to lead to anything more benign than a recession.

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13

Fair enough. But it will mean house prices are likely to fall at least 15-20%. You are comfortable with that? I am, but I am not sure you are given how much pride you seem to have in the increased valuation of your property. 

And I think it's unbelievable that some economists were predicting flatness in the housing market, or small gains (eg. T Alexander) when the conventional wisdom was very much that the OCR would be hiked aggressively.   

It's either incompetence or extreme bias. In Alexander's case, I think it's the latter as I think he's an intellectually smart guy.

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I have no problem with the average house price falling 15-20% as you mention.

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5

Don’t you think Tony Alexander’s January prediction for house prices in 2022 was a really poor one? 

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Why do you give TA so much time HM? Clearly he's bias, he works for the RE industry after all...

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Why? Because he's one of the most prominent economists in NZ, and he has a lot of influence.

Some of his analysis is good, but some of it is not. 

And economists should be called out when they get it wrong, given their influence. Calling them out means that people who might be influenced by such prominent economists can see that economists quite often get things badly wrong. Who knows how many FHB's might have bought mid to late last year because of the influence of Ashley Church and Tony. 

Of course, there's an outside change he might somehow be right, and house prices do on average increase by 5% over 2022. Although I doubt it. 

 

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He's a paid mouthpiece.

Real economists work at Universities, produce doctorates, contribute years worth of study in papers submitted to journals etc.

TA contributes to the herald.

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5

So because a number of people over last couple of years got excited paid way over value for houses Raf thinks we should stay on emergency OCR so these people done lose on their gamble. What about savers and NZD? He was also In transitory camp completely wrong if we go along with his thinking inflation will skyrocket and NZD will tumble.

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The cause for the high prices and high debt is not "the people getting excited and paud more", the cause is the RB lowering the OCR to 0 25%, people paying more is the result of the low OCR

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This is obviously because of emergency rates did you not read my post people like yourself got excited thought rates would never go up and I don’t see why now rates are on way up from emergency levels why people don’t just admit to mistakes and FOMO. Rates have to go up or NZD will lose value putting inflation even higher 

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2

So, "I got excited and thought that rates would never go up", what other stuff do you think you know about me?

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4

You made a million on a property in 7 months by cutting some trees down even with house prices falling or was that a story.oh you have not sold it yet so you think it’s gone up a million will be interesting to see once you sell it keep us informed.

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1

DTRH,

"This is obviously because of emergency rates did you not read my post people like yourself got excited thought rates would never go up and I don’t see why now rates are on way up from emergency levels why people don’t just admit to mistakes and FOMO."

Had you written that in an essay, there would be red marks all over it for lack of punctuation. Let's try and make it a little more understandable. This is obviously because of emergency rates. Did you not read my post? People like yourself got excited (and) thought that rates would never go up. I don't see why now rates are on (the) way up from emergency levels. Why don't people just admit to mistakes and FOMO?

 

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Another aspiring politician who wants to save some mortgage holders by unloading more dispair on the rest of us. Not raising the OCR high enough to fight off inflation will damage the cridentials and credibility of the RBNZ and send the New Zealand $ down creating more inflation. Overseas investors, who fund our current account deficit and buy our bonds, will demand a higher risk premium by demanding a higher yield (= % rates). New Zealand should stop living above it means and start saving.

Key take away from Dr. Carstens, the BIS (Bank for International Settlements)  General Manager lecture to the International Center for Monetary and Banking studies:

"The key to higher sustainable growth cannot be expansionary monetary or fiscal policy. We must
strengthen the productive capacity of the economy. Indeed, this is well overdue. Many of the
economic challenges we face today stem from the neglect of supply side policies over the past
decade or more. Over the medium term, higher potential growth would make it easier for
indebted economies to withstand the higher nominal and real interest rates that are likely to
prevail in the years ahead. Central banks have done more than their part over the past decade.
Now is the time for other policies to take the baton"

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5

Low inflation pre-pandemic was driven by:

  1. Services (Customer facing) Industries took a bigger bite out of people's spending than goods.
  2. Services Industries have far more competition so prices are kept as low as possible (your coffee fix; air fares: who remembered a return ticket to Hawaii was cheaper than a return between Tauranga and Christchurch; holiday accomodation)
  3. The main cost component of the services industry is labour and the globalisation made that cheap labour available for everyone. The race to the bottom could not be stopped and see the current dispute between Air New Zealand and their rehired crews.
  4. Services Industry relative price movements percolate less into the prices of other items and therefore don't create a broad inflationary spectrum.
  5. All the above caused a muted link between relative price changes and inflation. 

Current high inflationary environment caused by:

  1. Lockdowns caused a switch to spending on goods only
  2. Demand forecast,forward product ordering, allocation of production capacity and shipping of goods are not aligned. This is summarized as supply chain and excessive demand issues. Best example: GIB plasterboards. This effect is also called the Bullwhip Effect. 
  3. Years of under investment in the exploration and processing of commodities before the pandemic leading to very tight markets (Mainly metals and energy)
  4. More frequent climate events disrupting agricultural production
  5. The central banks anti-inflation cridentials and credibility hardwires our perception of high inflation. It is getting engrained in the bond markets and economical confidence surveys. Psychology effect!
  6. We have not switched back to the services industries, prevented by covid, and are still spending on goods.
  7. The funds made available by QE did not strengthen the productive capacity of the economy but only served to blow up asset bubbles.

The RBNZ does not have much influence on those but policy makers have. The focus should be on reducing all debt; strengthen the economy by creating more efficient markets (like the duo poly and the electricity markets) and New Zealanders should save more to reduce our reliance on overseas investors to make up our current account deficit.

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5

I agree with this dude - but not because the strategy will work - only because it will be politically unpalatable to keep driving the economy into the ground with higher interest rates acting like a hammer on our ‘over-exposed to asset prices’ nail. 
But stopping the OCR increases and retreating  will likely only be the first part of the first cycle. Inflation will push through it all (because globalisation is in reverse and protectionism is in vogue) and the second cycle will see rates come up further and stay there. The price if risk (in a world where central banks can’t save you) needs to be higher or we keep shovelling the cost of that risk onto the general population who can’t afford to keep underwriting speculators returns.

We made our bed by capitalising low interest rates into the price of assets - now we have to suck it up and pay the price for this stupidity.

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4

The idea that central banks cannot prevent supply side inflation is false - and dangerous.

The oil crises of 1973-74 and 1979 were both supply side shocks that set-off inflationary spirals. These were only brought under control once central banks increased interest rates to economy-crushing levels in the 1980s.

The task of central banks is now to minimise the coming pain. The sooner they get onto it, the better.

(Of course, those same central banks are largely culpable in getting us to the point where housing debt poses such a threat to the economy.)

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7

That’s not correct. 
The oil crises were largely caused by geopolitical factors, and interest rates had little impact on oil prices.

The crises did not resolve through aggressive hiking of interest rates, rather it was geopolitical resolutions plus supply side measures that did.

Consumer behaviour (ie. reducing car use) also helped, by quelling demand.

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The inflation will be transitory...once the defaults accelerate, but I expect the RBNZ will have passed 2%OCR before then.

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“The Government has to learn to use different tools, and learn not to rely on interest rates. Interest rates are a huge issue in the pricing of assets,” Manji said.

I find that to be waffle!

Interest rate hikes often pop Ponzi bubbles. Cry me a river. Inflation at these levels is pernicious and potentially extremely dangerous. I don't think there is time to implement "different tools"..

Inflation is here now and the OCR might be 3% by years end.

TOP won't be getting my vote again.

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2

I think a key part of his argument, which I agree with, is that interest rates also went far too low. That's a big part of the problem.

So we rely far too much on the OCR to supposedly stimulate the economy (by lowering it), and also to supposedly dampen it (by raising it).

His criticism is clearly on the flaws of using the OCR as a (or 'The') key economic lever, whether it's pulled up or down. 

Your comment seems to imply he only sees a problem in raising it.  

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I hear what you're saying HouseMouse, yet destruction brought through low-interest-rates is no great revelation.. perhaps my bent towards Austrian Economics helps me see more clearly on certain issues.

The reality is; to have capitalism, you need capital. To have capital you need a meaningful rate of return. With inflation at a 3 decade high an OCR of 1.5% is not going to cut it. 2% is not going to cut it..

LET'S REFLECT: Real Interest Rates are still negative - MORE negative than 2 years ago!

This is a gaffe at best by Raf Manji. As the self appointed housing party, TOP better hope their supporters don't read interest.co.nz. Raf Manji is of course a politician and gaffes happen.. this is an alarming one to the economically minded.
 

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Sure. Inflation is nothing to do with the billions of dollars we pumped into the economy recently... 

 

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Just another investment banker saying what investment bankers say . No vote from me .

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He should join the eco economic terrorists. The greens.

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Eventually RBNZ will be as ruthless as they need to be to bring inflation within the target band.

However at this point RBNZ hasn't even managed to arrest inflations very rapid ascent and the situation in China will likely jack up pressure at least for acouple of quarters (optimistically, if the CCP changed direction tomorrow.) The other thing is that they are working against every other Reserve Bank that is raising rates simultaneously. 

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Manji was also in the “high inflation is transitory” camp. - China and Russia are going to make sure inflation is anything but transitory for the west. 

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All things are "transitory" on a long enough timeline. Saying you believe a situation is transitory is completely meaningless.

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