Governor Adrian Orr admits Reserve Bank engineering recession, warns cutting wage demands needed

Reserve Bank Governor Adrian Orr lavished bad news on MPs at his appearance before Parliament’s finance and expenditure committee on Thursday morning, noting that the bank was deliberately engineering a recession to bring down inflation.

He said this was necessary to squeeze a “horrible environment” of pernicious and embedded inflation out of the economy.

Orr offered an olive branch of sorts, but this was also bad news: one of the ways of ensuring a softer landing and avoiding recession is for everyone to trim back wage demands - lower pay rises, and for employers to trim back price hikes.

Low wages, thinner margins, or a recession - it’s hard to think of a more unappetising economic cocktail.

Green MP Chlöe Swarbrick asked Orr what he made of the commentary that the bank was deliberately engineering a recession to get ahead of inflation.

“I think that is correct,” Orr said.

“We are deliberately trying to slow aggregate spending in the economy.”

Asked about avoiding the recession, Orr said that ordinary people had the power to ensure a soft landing by trimming their inflation expectations.

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“Ways of reducing the need to have negative GDP growth?” Orr asked himself.

He answered: “People could just start expecting lower inflation in the future and start working that way. The power is in the hands of the people if you just start behaving 1 per cent different around inflation expectations and wage growth then our job is easier - we don’t have to pay that cost.”

Orr said that if successful, the recession would still mean per capita consumption at pre-Covid levels.

The bank hiked the Official Cash Rate by a record 75 basis points on Wednesday and pencilled in further hikes next year, raising the rate to 5.5 per cent eventually. This is forecast to tip the economy into a year-long recession.

The bank is tightening rates to suck demand out of the economy by making credit more expensive, but it is also fighting a political battle trying to convince the public that the surge in inflation is not partly the fault of the bank which ran a loose monetary policy during the pandemic.

National Party finance spokeswoman Nicola Willis noted that Orr’s parting remarks in his press conference on Wednesday were to wish New Zealanders a “sensibly spending Christmas”.

She asked whether this included the Government - National has been urging the Government to trim spending.

“That includes the Government,” Orr said.

The bank’s comments in its Monetary Policy Statement on Wednesday were clear it expected the Government to do its bit in fighting inflation, in part by reducing spending

Orr poured cold water on an Act Party suggestion from Damien Smith to have an early committee meeting next year to reassess interest rates. The bank’s committee takes an extended pause over summer.

Orr said the committee’s next meeting in February would be “fine”.

The committee had the ability to urgently meet if necessary, but Orr doubted it would be.

“Monetary policy has long lags, but we’ve put a lot of tightening in the tin already,” he said.

Orr offered one ray of sunshine, saying the recession could be a “job-rich slowdown” because of the current tightness of the labour market.

Unemployment is still scheduled to rise above 5 per cent.

Orr said that unemployment, rather than asset prices, were a key metric of the economic health of households.