New Zealand Herald Business Editor, Liam Dann, reveals what the latest decision around the OCR means for New Zealanders
The Reserve Bank’s boss says he is very confident his team has helped put a lid on inflation and that it won’t be raising official interest rates any higher.
Kiwis have been battling fast-rising cost of living pressures over the past year, with rising interest rates on home loans among the biggest costs.
And yesterday the Reserve Bank again raised the official cash rate higher, lifting it 25 basis points to 5.5 per cent.
However, the bank also indicated it didn’t expect to raise it again in the future, potentially bringing relief to battling Kiwis.
Bank Governor Adrian Orr told Newstalk ZB’s the Mike Hosking Breakfast Show this morning all signals suggested the fast and hard OCR hikes had worked.
Hosking then asked Orr to use a number to measure his confidence the OCR won’t rise again - with 10 being so confident he’d be his life it won’t rise and 1 being he didn’t have a clue whether it would.
“I’d be at the 7,” Orr replied, saying he can’t give a 10 because predicting the future is impossible.
“Where the [Bank’s] Monetary Policy Committee is very confident is that monetary conditions are doing what we want them to do, which is constrain spending and reduce inflation pressure.”
Orr’s confidence goes against many economists and pundits’ predictions.
They had been forecasting the OCR could have risen by as much as 50 basis points yesterday instead of 25 and that further rises are likely in the coming months.
They argued an influx of new migrants is likely to push up spending and inflation with it.
When asked what he was seeing that the pundits weren’t, Orr said there were a number of factors at play.
These included the nation’s GDP growth being lower, inflation slowing and expectations of future inflation being lower, and an easing in the job market with employers finding it easier to get new workers.
It meant the OCR hikes were working and now patience was needed to wait to see their full effects, he said.
“We are in a watch, worry and wait position,” he said.
His team now projects the OCR will stay at 5.5 per cent until the first quarter of next year before potentially coming down.
Because OCR hikes are designed to reduce inflation by slowing the economy, but not so much it pushes the country into recession, Hosking asked a follow-up question.
Sunny Saharan, 37 and his wife Pooja Saharan, 34, are thinking of moving to Australia because their home loan payments are so high. Photo / Supplied
He asked did predictions that inflation is under control and the economy is set to avoid recession mean Orr has engineered a “soft” economic landing.
But Orr said he understood even a so-called soft landing would feel hard for ordinary Kiwis.
That is because even flat economic growth means people can be doing it hard compared with during periods of strong economic growth.
However, one pleasing element was unemployment remained at historically low levels, meaning most people are still earning salaries.
Former Reserve Bank Governor and National leader Don Brash also spoke with Mike Hosking Breakfast, saying he was most surprised by Orr’s comments that no further OCR rises are expected.
”Most people have been expecting it to go to 5.75 or 6 [basis points],” Brash said.
“[But] the governor indicated it would not be going higher and that was a surprise both for the market and me personally.”
Having previously worked as bank governor, Brash said Orr was in a sticky situation in an election year.
Orr and the Treasury are betting inflation is under control and no further OCR rises are needed - a position in contrast to the market and most pundits, who expect more rises are needed.
Brash said one side of the argument will be wrong, but he wouldn’t say it was Orr even though he disagreed with him.
“I hesitate to say that it’s the governor because he’s basically got more information than I do, that’s for sure,” Brash said.
”But it is a tricky situation because it is an election year, he has got to be objective and apolitical, and he would be accused of being political almost regardless of what he does.”
Brash did, however, believe forecasts there would not be a recession are most likely.
”The things which are driving demand are also the things which are expected to see a higher OCR like very high rate of immigration, that tends to drive demand and keep us out of recession,” he said.
”We have also got the rebuild from various weather events both in Auckland, Tairāwhiti, and Hawkes Bay. I think there is quite a lot of demand in the economy, which is why I think the governor would need to increase the official cash rate by more than yesterday.”
