Grant Spencer, a former acting Reserve Bank governor, said the central bank had been too slow to raise interest rates and was now playing catch-up. Photo / Mark Mitchell
Grant Spencer, a former acting Reserve Bank governor, said the central bank had been too slow to raise interest rates and was now playing catch-up. Photo / Mark Mitchell
Grant Spencer, who spent six months as acting Reserve Bank governor, says the central bank has been too slow to raise interest rates, thereby risking embedded inflation and a recession.
Spencer, now an adjunct professor at Victoria University of Wellington, told the New Zealand Economics Forum that monetary policy hadbeen too loose for too long.
By being slow to raise interest rates, the Reserve Bank was likely to have to ultimately hike the official cash rate (OCR) more than it would need to if it acted faster, Spencer said.
On Wednesday the Reserve Bank raised the OCR by 25 basis points to 1 per cent, despite seeing inflation rising above 6 per cent for the first half of this year.
It warned it is likely to have to raise the OCR to 3.35 per cent over the next two-and-a-half years, significantly higher than it expected in November.
Reserve Bank governor Adrian Orr has denied the central bank has been slow to see the impact of loose monetary policy. Photo / Mark Mitchell
Spencer said the gradual speed with which the Reserve Bank appeared to want to raise the OCR meant it still had "its foot on the accelerator until the end of this year" with the OCR below the neutral rate.
"That's not a good place to be if you've got a really serious inflation problem brewing, you should be moving back to neutral more rapidly. That's what's going to reduce the regret of an embedded inflation problem".
By moving sooner the Reserve Bank may be able to limit increases in the OCR to 2.5-3 per cent, Spencer said.
"If you're getting north of 3 per cent, that's the situation where you have embedded inflation is a problem, and the risk of a hard landing … is going to be greater."
Afterwards, Spencer told the Herald that while it became clear that demand was stronger than expected by late 2020, the Reserve Bank did not start raising interest rates until October 2021. "A bit of catch-up is needed."
He was effectively arguing for the Reserve Bank to hit the economy harder now to avoid having to hit it even harder later.
"It's more pain early to save pain early. That's my argument. Because the pain later, if you really get entrenched inflation, it can be really very costly to get rid of it, [it could] cause a recession," Spencer said.
"It's very rare to have tightening cycles that don't have some element of recession in them, but to improve that chance, in my view, they should be trying to get back to neutral and get on the front foot more rapidly."
Notes from the monetary policy committee's last two meetings showed "they clearly considered a 50-point move in November, they considered a 50-point move this time," Spencer said.
"On both occasions, they backed off that. I think they should have been on the other side of that."
While Opposition MPs frequently grill the Reserve Bank and comment on its decisions, criticism from predecessors of the governor is extremely rare.
Spencer spent a decade as deputy governor and head of financial stability at the Reserve Bank until September 2017, when he was made acting governor for six months, before retiring.
"I don't recall any past governor, or in this case, acting governor, making public comments like that," Michael Reddell, a former special adviser to the Reserve Bank, said, adding that he agreed "entirely" with Spencer's comments.
ANZ chief economist Sharon Zollner said it would be "pretty much unprecedented" for central banks to tame 7 per cent inflation without causing a recession. Photo / Dean Purcell
A Reserve Bank official said he was not aware of Spencer's comments, but as the same issues had been raised by MPs at a select committee appearance by the Reserve Bank this week "I'm not sure we can or would add anything more on this".
Questioned about whether the Reserve Bank's actions had inflated the housing market this week, Reserve Bank governor Adrian Orr said the sharp increase in house prices was due to a lack of housing.
"Our monetary policy impact has had a very large and significant impact on housing because of the constraint on the ability to supply houses," Orr said.
Speaking alongside Spencer on Friday, ANZ chief economist Sharon Zollner said with inflation possibly rising above 7 per cent, controlling inflation was the only mandate that counted.
"Everything else is a 'nice to have'," Zollner said.
After a boom in asset prices, New Zealand faced an unprecedented situation of raising the OCR at a time of falling house prices.
It "would be pretty much unprecedented, that central banks manage to beat 7 per cent inflation without a recession somewhere in the mix."
