Official cash rate increase: Reserve Bank’s Adrian Orr says Government ‘more of a friend than foe’

Reserve Bank governor Adrian Orr denies government spending is hindering the central bank’s efforts to cool inflation, saying fiscal policy is “more of a friend than foe to monetary policy”.

Orr made the comment at a press conference following the Monetary Policy Committee lifting the official cash rate (OCR) by 25 basis points to 5.5 per cent and largely sticking to its February projection that no further hikes would be required in this tightening cycle.

The RBNZ’s dovish tone surprised markets. Some economists believed a larger-than-expected Budget and stronger-than-expected net migration would be inflationary and therefore ultimately push the OCR as high as 6 per cent.

The RBNZ recognised the Budget included more spending than it expected. Indeed, both the operational and capital allowances grew by more than Finance Minister Grant Robertson foreshadowed in December, while the size of the forecast bond issuance programme surpassed economists’ expectations.

“Fiscal policy is projected to be less contractionary than the committee had assumed in February,” the RBNZ said.

“However, overall real government spending as a share of the economy is assumed to decline over the medium term. As a result, government spending will be less inflationary than in recent years.”

Asked at the press conference whether he was happy with the extent to which the Government will use borrowed money rather than reprioritised spending to deliver its Budget promises, Orr commented on how the Government’s policymaking was “more of a friend than a foe” to the RBNZ.

“We totally understand the challenges that society’s going through, and the Government spending/investment that’s needed,” he said.

“It’s net contractionary through the forecast period and that’s what matters most for our decision-making on monetary policy.”

The Treasury’s fiscal impulse (a measure of the change in the Government’s fiscal support for aggregate economic demand from one year relative to the next) is expected to be positive in the year to June 2024, before turning negative over the following three years.

The RBNZ noted that much of the increase in government spending will go towards the cyclone response.

While this will support economic activity - the construction sector in particular - the RBNZ repeated what Robertson has been saying in response to questions about the Budget’s impact on inflation, that spending will be spread over several years.

Beyond this, the RBNZ said: “Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.”

The Treasury expects core Crown expenses to rise to 33 per cent of GDP in 2024, before tracking down to 31.5 per cent by 2027.

Pre-Covid, core Crown expenses were very low (historically speaking) at 28 per cent of GDP, and peaked at 34.6 per cent in 2022.

The Opposition used the OCR increase to keep the spotlight on government spending.

“The RBNZ’s Monetary Policy Committee warned everyone in February that risks to inflation from fiscal policy were ‘skewed to the upside’. Since then, Grant Robertson has only poured more fuel on the fire,” National finance spokesperson Nicola Willis said.

Act leader David Seymour said: “As the RBNZ says, fiscal pressure will drop away eventually but not now. In the meantime, the ASB is straight out the gate with increased floating [mortgage] rates and other banks are sure to follow.

“The RBNZ admits to being surprised at the increased government spending. Even if you’re lucky enough to get the goodies from last week’s Budget, any benefits will be eaten up by inflation and interest rate increases in no time.”

The Green Party raised its concern around high interest rates slowing the economy and putting people out of work.

“Instead of relying on the RBNZ to use blunt economic tools to reduce demand, the Government can achieve far fairer outcomes by taxing wealth,” Green Party revenue spokesperson Chlöe Swarbrick said.

“Last year the RBNZ admitted in response to my questions that they are engineering a recession.

“These decisions are not happening in a vacuum, but in response to government policy that is not taking deflationary taxation measures.”