PM Christopher Luxon and Finance Minister Nicola Willis have inherited a tough economy. Photo / Michael Craig
The Reserve Bank’s call to keep the Official Cash Rate at 5.5 per cent was widely expected.
But, as is often the case with these announcements, the interesting information was contained in the comments the Reserve Bank delivered alongside the Official Cash Rate (OCR) decision.
Speaking to The Front Page podcast, NZ Herald Wellington business editor Jenée Tibshraeny says that the Reserve Bank sent a strong message that the fight against inflation is far from over.
“[Reserve Bank Governor] Adrian Orr said ‘We’ll watch, worry and wait, but we’re also willing to increase the OCR again,’” says Tibshraeny.
“The Reserve Bank actually pencilled in another OCR hike for 2024.”
This runs against the grain of the narrative that was forming the wider market, which suggested that the Reserve Bank could start making cuts far earlier than first anticipated.
The Reserve Bank, says Tibshraeny, was sending a clear message to banks not to start cutting rates too early and that there was still work to be done in the fight against inflation.
“The economy is off-kilter... Before Covid, we had some systemic issues, we had an infrastructure deficit and house prices were too high. Then Covid comes along, we shut the borders and pump a whole lot of stimulus into the economy. Everything comes to a standstill. People can’t come in and prices go up. That Covid hangover is still with us.”
Once the restrictions ended, those problems weren’t automatically fixed - and we now, in fact, have new issues emerging.
“Recently, we had these labour shortages, where businesses couldn’t find the right people to do the job. And now we’ve loosened immigration settings, so we have way more migrants coming in, but house-building is dropping off. That could put pressure on the housing market. There are still so many things that aren’t quite level. We’re still in for a bit of a rough ride for the new year or maybe two years.”
New Prime Minister Christopher Luxon has pledged to get on top of this problem and believes the Government can also do its part to reduce spending.
He has already pledged to remove the Productivity Commission and to further cut the public sector workforce by approximately 6 per cent.
Tibshraeny says that these cuts aren’t likely to have any immediate effect on inflation given that they will take some time to bed in, but they could help push the market in the right direction.
“If the public sector is hiring fewer people, uh, there won’t be as much pressure on wages,” she says.
“We’ve seen over the past few years that people have been able to bid up their wages because the labour market was tight.”
That situation might alleviate, but there’s another big fishhook that Luxon could encounter as he looks to make these cuts.
“Our growing population does mean we may need more investment in public services... There will be areas where we actually need more public servants to service our larger population. That will be the thing to watch in the coming years. It’ll be important for the Government to be held to account. You can’t just go cutting jobs and then hiring more expensive consultants to do the work.”
So how long will it take to get inflation under control? When can we expect to see mortgage rates start dropping? And are tax breaks in the middle of next year really what the country needs?
Listen to the full episode for an in-depth discussion on the economic tightrope Luxon will be walking.
The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5am. It is presented by Damien Venuto, an Auckland-based journalist with a background in business reporting who joined the Herald in 2017.
You can follow the podcast at iHeartRadio, Apple Podcasts, Spotify, or wherever you get your podcasts.
Liam Dann takes a deeper dive into the week's economic news