Adrian Orr and Reserve Bank tell MPs, new Government that inflation is ‘number one evil’ for everyone

Reserve Bank Governor Adrian Orr is appearing before Parliament's finance and expenditure committee this morning. Photo / Mark Mitchell

The spectre of Robert Muldoon, eternally evil inflation, and a mystery around migration were raised at Parliament as Adrian Orr faced MPs.

The Reserve Bank (RBNZ) Governor said migration had clearly eased the labour shortage but it’s still not clear why the country’s economy performed so poorly recently.

And he said inflation was undoubtedly the “number one evil” for everybody in the economy. Orr appeared before MPs this morning at a time of ongoing concerns over inflation and interest rates.

Orr referred to last week’s disappointing GDP results showing the economy shrank 0.3 per cent in the September quarter.

The Reserve Bank was “internalising that complex situation,” he quipped, referencing the Ghost Chips ad.

“Internationally, economic growth has been stronger than was expected at the beginning of this year,” Orr said.

“In New Zealand, demand growth has eased.”

He said job ads were now down below pre-Covid levels.

High migration

Migration was also discussed.

“In the short term, we have been surprised by the extremely high levels of net inward migration,” Orr said.

More than 100,000 net migrants in a year had not added sufficient oomph to get the economy out of its mediocre GDP performance.

High migration basically meant “more people, more demand”.

But spending per person was falling.

The impact of population growth on house prices was discussed.

“A larger population means more demand,” Orr said. “How do you increase the flexibility in supply of housing?”

Orr said in truth nobody knew what the optimal net migration number was for New Zealand.

‘Number One Evil’

“The worst thing for all members of the economy... is inflation. The number one evil is inflation,” Orr said.

The bank’s Monetary Policy Committee in November agreed to maintain the Official Cash Rate (OCR) at 5.5 per cent.

The RBNZ at the time warned that inflation was too high and monetary policy would have to stay restrictive.

Orr said interest rates were likely to stay put.

He also touched on the bank’s amended remit, which removed the objective to support maximum sustainable employment.

But the remit retained an inflation target of 1 per cent to 3 per cent over the medium-term, with a focus on the 2 per cent mid-point.

The Monetary Policy Committee committee would not have made any different decisions over the past five years even with the amended remit, Orr said.

He conceded the RBNZ maybe could have raised the official cash rate earlier, but said it wasn’t clear if that would have halted inflation’s rise.

Orr said he expected consumer price inflation to be back underneath 3 per cent by mid-2024.

But he said it was impossible to pinpoint a time and place where inflation would be at a precise level - unless you tried some of the strange price control and other policies former PM Sir Robert Muldoon did.

Sir Robert Muldoon was invoked as an example of what not to do. Photo / NZME

It was widely agreed at the meeting that GDP results last week were a surprise.

That in turn raised questions about how good the RBNZ was at predicting major movements in the economy.

The Governor added: “What’s going to be the next unanticipated event? Over the past five years we’re just short of locusts, that’s the only thing we’ve missed so far.”

Select committees provide MPs with the chance to question public servants about key events, their performance and policy issues.

The Finance and Expenditure Committee has 11 members and its chair is Kaikōura National MP Stuart Smith.

Committee members include former Finance Minister Grant Robertson, Te Pāti Māori co-leader Rawiri Waititi and Auckland Central Green MP Chlöe Swarbrick.

Robertson said the RBNZ was not expecting such poor GDP results from the September quarter.

But he added: “Neither was anyone else.”