Central banks are in a global race to get inflation under control. The Reserve Bank of NZ was first to hike amid Covid, but it may be the last to cut.
Video / NZ Herald / Carson Bluck / Getty
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
If you have a big mortgage and are refixing any time soon then you could forgiven for being a bit baffled by headlines suggesting the Reserve Bank’s “dovish” tilt was good news for homeowners.
The RBNZ didn’t hike interest rates again. That’s a win I guess. Andsome gentle softening of its forecasts for inflation and the interest rate path ahead was heartening.
We’re making progress in the inflation fight, was the message. But my gosh it is slow progress, isn’t it?
Markets seized on the shift in tone in their usual binary way. We saw the dollar and wholesale interest rates fall.
Many economists moved their forecasts back to their slightly more optimistic stance - with a view that we’ll see a rate cut by November. That’s a few months sooner than the Reserve Bank is currently prepared to concede.
But, good news?
I think for most ordinary Kiwi homeowners, the big takeout was simply that we can expect no significant interest rate relief for the rest of the year.
I can hear the growing panic setting in in the letters I get sent.
Mortgage pain is set to increase as rates stay high. Photo / Alex Burton
High inflation is a chronic pain for the economy. We feel it everywhere. Inflation makes people very grumpy.
High interest rates on the other hand are an acute pain. The pain is targeted and for those most exposed - businesses with high debt and new homeowners with giant mortgages - it hits ferociously, like a nasty migraine.
It’s a brutal fix and it’s not surprising that with every hiking cycle, a new generation asks the question: why do have to suffer through this kind of pain?
I suppose the first thing we need to remember is that inflation, left unchecked, can be truly disastrous for an economy. It can cause a complete social breakdown.
The higher it goes the more trust it erodes in the currency. History is littered with examples showing that when that goes, everything does.
The most often cited example is Germany in the 1920s where inflation got up to something outrageous like 20 per cent a day!
A more relevant example for most Kiwis is the relatively high inflation era of the 1970s and 1980s.
Between 1970 and 1990, inflation never fell below 5 per cent in New Zealand. It averaged 13 per cent from 1974 to 1987 and peaked at 17 per cent in 1980.
The economy effectively spiralled out of control and Kiwis could feel themselves getting poorer.
More recently there are all sorts of grim examples in economies like Argentina and Turkey.
These examples provide a good argument for never letting it get out of hand in the first place.
But things aren’t quite that simple we need some flexibility in the system to pump the economy when demand collapses as it did in the GFC and again during the pandemic.
The consensus now is that we pumped it too much. But, regardless, we had to do something to save jobs and businesses as the lockdowns hit.
And there was always going to be a price to pay. This year we’re paying it.
Why though, I am often asked, can’t we find more nuanced ways of rebalancing? Surely there are other options than loading interest costs on young homeowners.
Here’s a good suggestion I was sent this week:
Make KiwiSaver compulsory and then empower the Reserve Bank or Government to shift the level of mandatory contributions as required to add or remove cash from the money supply.
I like it because I think compulsory saving is something that would change the game for New Zealand.
You have to wonder why on earth we don’t have it. One of the biggest structural issues with the New Zealand economy, relative to our international peers, is a lack of savings.
A high private savings rate would give the Government more room to borrow and fund big infrastructure projects.
Yet even though we’re always pointing to Australia and bemoaning their higher standard of living, there never seems to be popular support or political will to implement the economic policies they have. We could put a capital gains tax in that same category.
Of course, in reality, the KiwiSaver idea course would be politically difficult and quite complex to administer.
And that is the reason why using monetary policy to target inflation dominates the global economy.
Its biggest strength is its simplicity. It is easy to apply and it works.
It certainly helps if the Government runs fiscal policy that supports monetary policy. The new Government alleges it will do a better job of that than the last, although I’m not quite sure handing cash back to us in tax breaks will help.
Perhaps by the time they arrive next year, inflation will be back in its box. We can hope.
But until then we have to watch and wait - as the Reserve Bank puts it - and tread water to stay afloat.
Rather than just leave things on such a grim note, I will add that, long term, my hunch is that we live in a world where deflationary forces are more dominant than inflationary forces.
They certainly were before the pandemic and (while supply shocks played a part) most of the inflation was of our own making as we increased the money supply.
Two of the biggest socio-economic drivers are deflationary right now: an ageing population and the rapid adoption of AI technology.
