Business Editor at Large Liam Dann explains the Official Cash Rate, and how the Reserve Bank sets the OCR to influence the economy.
OPINION
We voted to kick out one of the most incompetent governments, but Labour appointees are still making decisions.
The chairman of the Housing Authority, formerly the former trade union secretary and Labour MP, Mark Gosche, has tendered his resignation but remains on the board.
The Coalition hasonly been able to make one appointment to the Housing Authority.
Fulfilling an election promise for an independent wide-ranging inquiry into the response to the Covid pandemic the terms of reference are being reviewed. The Labour-appointed commissioners remain. The chair, Professor Tony Blakely, has opined in an article in the British Medical Journal that Labour’s strategy of elimination is probably the “optimal” response.
National and Act campaigned to make controlling inflation the Reserve Bank’s sole task. Parliament has legislated to remove the bank’s dual remit of inflation and employment to make controlling inflation the bank’s remit.
The Reserve Bank Governor in his post OCR briefing was asked if the change in the bank’s remit had influenced the bank.
The Governor emphasised that despite the alteration in the bank’s remit, it did not sway their decision-making process.
The coalition has not got a single appointee on either the board or monetary committee.
The Governor is appointed by the board on the recommendation of the finance minister.
Grant Robertson reappointed Reserve Bank governor Adrian Orr. Photo / Mark Mitchell
Grant Robertson reappointed the Governor for five years. Last year the finance minister extended the term on the monetary committee of Peter Harris, the trade union economist.
There is a refusal in Wellington to accept that the coalition won the election and has a democratic mandate.
It could be that the Reserve Bank is correct, and inflation will be 3 per cent this year and 2 per cent the next year.
What is indisputable is that the bank could also be wrong. Inflation could remain over 50 per cent higher than the Bank’s target.
In my opinion, a Reserve Bank whose sole remit is inflation would have increased the OCR for the reasons set out by the ANZ Bank’s economists.
The Reserve Bank is placing a lot of reliance on a survey of 38 business leaders who told the bank that they believe inflation will fall. Did the survey include Air New Zealand that has announced an intention to increase fares? What about councils that are planning double-digit rate increases?
Last week’s OCR decision is not going to make any business reconsider its pricing intentions.
The February ANZ-Roy Morgan Consumer Confidence survey found most of us believe inflation will be 4.5 per cent next year. A belief that will influence wage expectations.
One of the reasons the Reserve Bank failed to control inflation is Labour had its foot on the accelerator. The bank says it is waiting to see the May budget before assessing this government’s fiscal policy. I know of no economist who believes that just asking departments to spend less will rein in spending. Borrowing and spending is inflationary regardless of who is in government.
The Bank did not assess whether the coalition’s intention to cut income taxes will be inflationary. Tax cuts without corresponding expenditure cuts or extra revenue is inflationary.
The Kiwi fell on the OCR announcement. A lower Kiwi means higher import costs.
The inflationary risks are high.
Perhaps the Governor’s comment in the post-OCR briefing that he expects the economy to make a soft landing explains the bank’s decision. Reducing inflation while ensuring the economy makes a soft landing is the holy grail of monetary policy. The problem is that an economic soft landing and low inflation is as likely as finding the holy grail.
The cost-of-living crisis cost Labour any hope of winning re-election. A failure to control the cost of living will almost certainly cost the coalition re-election.
It is nonsense that political appointees are entitled to serve out their term.
As Minister for SOEs I made more appointments than any other minister. I never hesitated to ask for and get resignations.
It is common practice in the US for all high-level political appointees to tender their resignation on the Inauguration Day of a new president.
The current Federal Reserve chair Jerome Powell was nominated by former president Donald Trump in 2017 and then subsequently nominated to a second term by President Joe Biden.
The New Zealand Government must write to all political appointees and request their resignation. Not all should be accepted.
The Reserve Bank is an exception. For four years the bank has failed to meet its remit of keeping inflation below 3 per cent. In my opinion, the governor, monetary committee and board should all go.
Ministers need to ask themselves, “is it more important that they keep their jobs or that the Governor of the Reserve Bank keeps his job”?
Richard Prebble is a former leader of the Act Party and a former member of the Labour Party.
