When inflation is high, it increases the OCR to make money more expensive.
Arena Williamsis the Labour MP for Manurewa.
OPINION
There was no shortage of relief last week following the Reserve Bank of New Zealand’s (RBNZ) decision to cut the Official Cash Rate to 5.25%. However, this positivity was nowhere to be seen among the Manurewa families who came along to my housing clinic on Friday. For them, the focus was on rents going up and why it’s so hard now to access the foodbanks they rely on in tough times. These people could be forgiven for thinking that whatever good news was out there, it had little to do with them.
And perhaps this mindset is the right one more generally. Interest rates are used in a counter-cyclical way. They are lowered when the economy is weak and raised when it is hitting its capacity and at risk of generating inflation.
Consider low mortgage rates in the 2010s. Those rates are seared into my memory because I started looking for a first home in 2014 and we finally found our two-bedroom place in 2017. But low interest rates then were a sign of a weak economy, rather than a strong one. We simply hadn’t generated enough momentum for the economy to keep moving along without the assistance of expansionary monetary policy.
While a rates cut may be welcome relief for homeowners who have been enduring both high interest rates and elevated inflation, the RBNZ decision also signals deeper concerns for the New Zealand economy.
National MPs attributed the interest rate cut to their “careful and deliberate plan”. This was presumably in the hope that some people had not been paying attention until now.
As my friend and Labour finance spokeswoman Barb Edmonds says, core inflation peaked in early 2023 and has been coming down steadily since. A number of quarterly measures of core inflation had been falling fairly consistently since mid-2022.
Labour finance spokeswoman Barbara Edmonds. Photo / Mark Mitchell
Christopher Luxon pins this on three actions his Government had taken: changing the RBNZ’s mandate, scrapping Fair Pay Agreements, and bringing back 90-day trials. None of these actions has plausibly contributed to inflation falling any faster.
So if inflation is expected to be back in its target range in the current quarter, broadly in line with what forecasts have been saying for some time, why has the RBNZ moved to cut rates earlier than it had signalled? The reason is that the economy is deteriorating far more quickly than the RBNZ has previously anticipated.
As recently as its May statement, the RBNZ expected reasonable GDP growth of 0.8% over the rest of the year. It is now forecasting GDP to shrink by 0.6% over the same period. Business activity is falling in both manufacturing and in services. Job creation and hours employed numbers and wage growth are all slowing. Business investment is expected to be cut back over the next year and residential investment is falling even faster.
Are these the conditions that warrant a celebratory KFC dinner in the National caucus room? The RBNZ now expects unemployment to peak at 5.4% in mid-2025. That would mean approximately an additional 26,000 people unemployed since the last quarter we have data for and a staggering 75,000 more unemployed people than the low point that we saw in early-2022. Many more will struggle to get the hours they want.
Food prices remain unaffordably high, even if they are not rising as fast. Those Manurewa families who came to see me last week aren’t wrong to feel like the positive economic news stories aren’t about their lives. They are feeling the relentless pressure right now, and it’s not letting up.
Prime Minister Christopher Luxon and Education Minister Erica Stanford visit a Manurewa primary school. Photo / Dean Purcell
In place of a plan for supporting those families through job losses, the National-led Government has resorted to type. Its approach to jobseekers reflects a presumption that the main barrier to work for these people is their own motivation, rather than the unavailability of jobs. A flaw in our economic system has been recast as being the fault of the people that it is failing.
When the Labour Government proposed an income insurance scheme, National derided it as a “jobs tax”. If we had that scheme in place now, those being laid off through no fault of their own would know they were still able to pay rent or the mortgage and grocery bills. They would have been supported to retrain in order to take up opportunities in other industries.
Now that the rainy day has arrived, we know what National’s alternative is – ignore their responsibility for managing the economy and blame the people out of work for the predicament they find themselves in. As Chris Hipkins has said, this is no less than kicking people when they are down.
So what should National be doing? The delays and cancellations of infrastructure projects are exacerbating a construction sector slowdown that has already led to 6000 fewer construction workers in employment.
National’s cost-of-living policies have made little difference to those who truly need the support. Targeted measures such as free prescriptions, school lunches and free or half-price public transport for kids were all cut so National could afford its tax cuts. People struggling to pay the bills should not have to compromise on their children’s schooling or their family’s medication.
For all of National’s rhetoric, they have never had a coherent economic plan. The tactic to date has been to cut taxes, whatever the cost. That is not a strategy. For the thousands of New Zealanders worried about the security of their jobs, the underlying worry is we have a Government that is focused on political management at the expense of economic management.
