OCR hike: Opposition questions RBNZ’s thinking on immigration and govt spending

The Opposition is questioning the assumptions behind the Reserve Bank’s (RBNZ) view that it’s unlikely further interest rate rises will be required to get inflation back in its box.

Members of Parliament’s Finance and Expenditure Committee quizzed RBNZ officials on Thursday morning on what gave them confidence high net migration and a larger-than-expected Budget wouldn’t add much fuel to the inflation fire.

The questions came as the RBNZ on Wednesday surprised financial markets by suggesting the official cash rate (OCR) would peak at 5.5 per cent – the level it lifted the rate to.

RBNZ governor Adrian Orr told the select committee the economy was cooling quite a bit despite net inward migration surpassing 65,000 people in the year to March.

The RBNZ also shared the Treasury’s view that net migration would eventually drop off, as the current spike reflects a release of pent-up demand.

As for government spending, the RBNZ recognised the Budget was “less contractionary” than expected, and the Treasury saw it to be expansionary in the year to June 2024. But in the three years after that, the RBNZ noted the Budget was contractionary.

One of the Opposition’s key attack lines has been that the Government is spending too much – causing pain for those struggling to meet rising living costs and mortgage payments.

While Act has published an alternative budget outlining how it would slash spending, National will only do so once the Treasury publishes a fresh set of economic forecasts shortly before the October election. As it stands, National hasn’t pinpointed material spending cuts, but has committed to providing tax relief by adjusting income tax brackets for inflation.

Reserve Bank Governor Adrian Orr notes retail spending is down despite strong immigration. Photo / Mark Mitchell

National’s finance spokesperson Nicola Willis asked Orr whether there was a risk the RBNZ was underestimating the impact of government spending, as it did in 2020 and 2021 when all the stimulus it provided alongside government support contributed towards creating the current inflation problem.

Orr responded: “On the monetary and fiscal coordination, we work as close as we can.”

Most bank economists were surprised by the size of the Budget, and the fact the Treasury increased its forecast debt issuance programme by 20 per cent in the four years to 2027.

Some still believe there’s a real risk the OCR will need to rise to 5.75 or 6 per cent.

National’s revenue spokesperson Andrew Bayly asked RBNZ officials why they saw immigration slowing down.

RBNZ chief economist Paul Conway explained: “There is no doubt some pent-up demand to immigrate to New Zealand. We’re seeing that globally; we’re seeing that in the tourism numbers as well. Something that’s been repressed for a while – it bounces back strongly.

“I totally take your point that this is one of many potential sources of uncertainty going forward.

“Although I should say, we’ve got migration still going down to a pretty solid level. We’ve got it going back to where it was in the three or four years prior to the Covid pandemic, which is around 10,000 a quarter; 38,000 annually.”

The RBNZ, in its Monetary Policy Statement, concluded the overall impact of immigration on inflation was unclear in the current environment.

It noted immigration policy settings have been eased to allow more people to come to New Zealand to alleviate acute labour shortages.

“This is providing some relief in a very tight labour market, but the net impact on demand – including for housing – is highly uncertain, as is the impact on inflationary pressure,” the RBNZ said.

“Adding to this uncertainty, changing immigration rules have also meant changes to the composition of immigrants. As a result, the extent and timing of immigrants adding to demand and inflationary pressure may be different to before Covid-19.”

Bank economists are also divided on how inflationary immigration will be.