OPINION
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Markets think it’s odds-on that the Reserve Bank will cut the Official Cash Rate today at 2pm. Economists see it as a real possibility, but most expect the bank won’t.
Either way, it’s a huge call, and not just for struggling mortgage holders!
If the RBNZ leaves the rate unchanged at 5.5% then it risks taking too much demand out of the economy. Unemployment is already on the rise, and the number of business failures is rising. Economists at ASB, Kiwibank and the BNZ have argued that the RBNZ must move now to avoid long-lasting economic damage.
But if the RBNZ cuts - with the inflation rate still officially above the 3% mandated upper limit - it runs the risk of having to backtrack.
If inflation were to spike up again then the RBNZ might need to lift the rate again. That would likely do more damage than delaying the cut - leaving the economy trapped in stagflation (the “worst of both worlds” zone with regard to inflation and recession).
So, what will the RBNZ do? But first ... who gets to decide?
It’s a common misconception that this decision is all on Reserve Bank Governor Adrian Orr.
Since 2019 the decision about interest rates has been made by a monetary policy committee. Before that the sole responsibility lay with the governor.
But even then governors would rely on an informal committee or advisory group to ensure robust decision making. However, the process was formalised in 2019 to bring the RBNZ into line with best international practice.
There’s no doubt the governor still has a huge influence on the culture and outlook at the Reserve Bank.
Ultimately though, Orr is just one of a group of seven high-powered economists who will decide what happens to interest rates today. And he’ll be hoping there will be enough consensus that he’s not even required to cast a formal vote.
The governor is the chairman of the Monetary Policy Committee and as such would cast the deciding vote if the committee can’t reach a clear majority.
Thus far a deciding vote has not been needed. May last year was the only time a vote has been needed at all. Back then two of the seven committee members voted not to lift the OCR by 25 basis points to 5.5%.
The committee - which consists of three internal RBNZ members and three external plus the governor - has changed since then.
RBNZ internal members
The internal members will be familiar faces to those who tune into RBNZ press conferences or follow the news (you can see today’s live-streamed on nzherald.co.nz at 3pm). They are deputy governor Christian Hawkesby, assistant governor Karen Silk, and chief economist Paul Conway.
Hawkesby is also the general manager of financial stability at the Reserve Bank. He joined the RBNZ in 2019 and was reappointed for a five-year term in January 2022.
Previously he was with fund manager Harbour Asset Management. He also spent nine years at the Bank of England.
Silk is general manager of economics, financial markets and banking. She was appointed for a five-year term in May 2022 and was previously at Westpac, where she had a long and varied career at an executive level.
Conway is the director of economics. He joined the RBNZ from BNZ where he was chief economist. Prior to that, he was director of economics and research at the New Zealand Productivity Commission. He has also worked at the OECD and with the World Bank.
External members
The longest-serving external committee member is Bob Buckle. He is professor emeritus at Victoria University of Wellington and was pro vice-chancellor and dean of the Victoria business school from 2008 to 2017. Buckle was the principal adviser at Treasury from 2000 to 2008. He was also chairman of the National Government’s tax working group in 2009 and 2010. He was re-appointed for a three-year term in April 2022.
There was some controversy within economic circles about the previous composition of the committee being light on specific monetary policy macro-economic expertise.
That appears to have been addressed with new appointments, made by Finance Minister Nicola Willis this year.
Carl Hansen, appointed in April, is an economist and executive director of Capital Strategic Advisors (an independent consultancy based in Wellington). He has been chief executive of M-co New Zealand and the NZ Electricity Authority. Hansen was appointed to the committee for a three-year term. Hansen has also worked for the RBNZ, Treasury, and New Zealand Business Roundtable.
The newest member of the committee is Prasanna Gai - professor of macroeconomics at the University of Auckland and head of the departments of economics, accounting and finance, and property. Gai is an Oxford graduate and worked at the Bank of England from 1994-2007. He was a professor of economics at the Australian National University from 2008. From 2010 to 2012, Gai was special adviser to the governor of the Bank of Canada (Mark Carney), and served on the Bank of Canada’s senior leadership team as well as its Monetary Policy Review Committee.
He is a member of the board of the Financial Markets Authority, a senior research fellow at the Deutsche Bundesbank, Frankfurt, a fellow of the National Institute of Social and Economic Research, London, and a research associate of the Centre for Applied Macroeconomic Analysis, Canberra.
Gai has been appointed to the committee for a four-year term, beginning on July 1.
There’s no shortage of opinions out there about which way the committee will lean today. For a full rundown of what local bank economists are thinking check out Jamie Gray’s preview story here.
At this point, I’m inclined to think that the RBNZ will steel itself, look through the market and public expectations, and wait. It would be easier to play catch-up with a double cut (50 basis points) in October or November if needed than to have to lift rates back up if inflation doesn’t fall as expected.
In theory, inflation (currently 3.3%) is well on track to be back below 3% in the next few months. But with non-tradeable (domestic) inflation still riding high at 5.4% we’re allowing lower import prices (tradeable inflation) to do the heavy lifting. If there was to be an oil shock or some other supply chain issue pushing prices up we could be in trouble.
Cutting today would be a calculated risk. That’s not to say that it isn’t one that’s worth taking. But it’s a tight call and usually, central banks don’t like to take calculated risks. In fact, under Orr, they have stated a preference for following the path of least regrets.
On that basis, you’d probably wait.
On Sunday I wrote about the real price we’ll pay for beating inflation. I was primarily looking at the shockingly high rate of youth unemployment, buried in otherwise historically moderate levels of overall unemployment.
For the record, topline unemployment landed at 4.6% for the year to June. Over the year, unemployment rose to 143,000 - an additional 33,000 jobless.
Nearly half of those freshly unemployed were young people. Annually, unemployment for people aged 15 to 24 years rose 14,400 or a seasonally adjusted NEET rate (the proportion of young people not in employment, education, or training) of 12.8% (from 11.7%).
In the 15-19 age group, the unemployment rate is now above 20% - up from 15.1% in the last quarter.
Shocking enough. I also mentioned the likelihood that the data for Māori would look a lot worse and would have included the numbers if I could have found them.
I put in a belated request to Stats NZ and what they came back with is really quite worrying, although perhaps, sadly, not all that surprising at all.
The unemployment rate for all Māori youth (aged 15-24) is now 20% and the rate for young Māori aged 15-19 is now 30% (see below).
On both measures, that’s doubled since June 2022 when unemployment was at record lows.
With all this talk of getting tough on beneficiaries, it is worth remembering that higher unemployment is an inevitable part of the process when we shrink demand in the economy.
The trade-off between inflation and unemployment has long been recognised. Legendary Kiwi economist Bill Phillips was the first to try and quantify it.
The Phillips Curve (as his theory became known) was developed in the 1950s and tells us there is an inverse correlation between unemployment and inflation: when one falls the other rises and vice versa.
Many of the young people who’ll struggle to find employment, or who lose their jobs, in the coming months have no idea what is going on at a macro-economic level.
They’ll most likely believe they’ve failed. Economics tells us that many never had a chance.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
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