Reserve Bank Governor Adrian Orr during their OCR review media conference in Wellington. Photo / Mark Mitchell
Adrian Orr, Reserve Bank Governor, says there will be pain in store for the public - but it’s necessary to bring down inflation.
Orr appeared before the Finance and Expenditure committee at Parliament this morning.
He said inflation was the “biggest bugbear” influencing negative trends in the economy, and inequality.
“We are determined to get rid of consumer price inflation.”
Orr told MPs that core government consumption was declining after the big spending during the Covid-19 pandemic.
“We’re managing that risk by making sure we retain a restrictive monetary stance,” he told Act leader David Seymour.
“It doesn’t seem plausible that fiscal policy is helping you in the next two years,” Seymour said.
Labour MP Helen White asked about the split opinions within the bank about the rates hike.
The Reserve Bank (RBNZ) yesterday raised the Official Cash Rate (OCR) by 25 basis points - taking it to 5.5 per cent.
“On the division in the committee and the voting, there is no division, it’s a committee decision,” Orr said.
He said Minister of Finance Grant Robertson had no insight into the committee’s decision-making deliberations.
Orr said the committee was confident it was being restrictive on aggregate spending.
“Our task is to achieve 1-3 per cent inflation,” he told Green MP Chlöe Swarbrick.
To do this, domestic spending had to be slowed, Orr said.
“And that is occurring ... It will feel painful for people. We love to consume, but it’s necessary to take the inflation pressure out of the economy.”
The RBNZ said it still expected 5.5 per cent as the peak for OCR. It anticipates cuts from the third quarter of 2024.
“As headline inflation comes off ... inflation expectations may fall faster,” Orr added this morning.
“We’re making assumptions people will restrain spending. They may restrain spending significantly more.”
Trends in global inflation could also influence the domestic outlook, he said.
Rising immigration was another important element, he said.
In fact, the high net migration of the past year meant per capita spending was down even more than an initial glance suggested.
National MP and finance spokeswoman Nicola Willis asked about the RBNZ’s previous predictions.
“Why do you think you got the predictions so wrong a year ago?”
Orr said the RBNZ had adapted monetary policy as new information arose.
Willis said the central bank as “wildly wrong” about how to get inflation below 3 per cent and had overestimated its own ability to do so.
Labour MP David Clark asked about prospects for the tourism sector.
“We’re seeing tourists stay for a bit longer and spend a bit more,” RBNZ chief economist Paul Conway said.
He said Chinese tourists had still not largely returned.
“We’re seeing workers move back into tourism-related sectors. We’re talking to tourism operators.”
Orr said travel bans abroad had obviously stifled tourism but those negative trends could quickly be reversed.
“That can be a very quick change variable because planes can turn themselves back on quickly.”
“Core inflation is still elevated in New Zealand,” Conway added. “But we’re seeing in the data that the economy is cooling.”
He said RBNZ research indicated inflation expectations could adjust quickly.
“There are reasons for the committee to be confident.”
Helen White asked if bank deposit rates were too low.
“We would like to see them rise,” Orr added.
Willis asked Orr if he had failed his mandate, and added: “Is there a risk that we’re repeating history here and inflation will remain high as a result of decisions made this week?”
Orr said he had not failed his mandate and he was confident the bank was making the best decisions on the available evidence.
“But if things change, things change.”
Following yesterday’s decision, ASB was the first major bank to lift its interest rates.
Its Housing Variable rate will move from 8.39 per cent to 8.64 per cent while the Orbit home loan rate will move from 8.49 per cent to 8.74 per cent.
Willis yesterday attacked Labour’s “mismanagement of the economy” after the RBNZ’s announcement.
“This latest interest rate hike may have been avoided if the Government had been more disciplined with its own spending and done more to take pressure off inflation,” she said.
“Instead, Labour’s mismanagement of the economy has delivered New Zealanders the toxic trio of high inflation, rising interest rates and looming recession.”
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