Call it the “All Black” approach to monetary policy, where the economy pops and slides into recession after they have run right over you without a qualm.
Now it’s inflation that will get that lesson after trying to escape from the Reserve Bank of New Zealand’s repeated attempts to bring it under control this year. That failed, so it’s time for a record 0.75% lift in the country’s official cash rate that was announced on Wednesday.
Who says the Kiwis can’t match it with the big boys – the US Federal Reserve, the European Central Bank and the Bank of England?
All are bazooka-wielding central banks – firing off rate rises of either 0.50% or 0.75% willy nilly just as their economies are slowing as they head towards 2023 and a further slide.
No sedate 0.25% rate rises like we have had from the Reserve Bank here – just a stonking boost to the OCR from 3.5% to 4.25%.
And why such a big increase, especially when the RBNZ has forecast a further rise in inflation for the next three to six months, a rise in unemployment and a recession starting around June next year?
It has determined to control inflation first and everything else later but at least NZ will not see a recession as deep and lingering as Britain has started – that’s if the RBNZ gets it right.
Inflation in fact seems to have caught the RBNZ a bit short, judging by the sharp rise in the projected peak for the OCR.
The central bank had forecast a peak for the OCR of 4% and for it to remain there through all of 2024 in its previous monetary policy report three months ago. Now it’s a peak of 5.5% by mid-2023 and staying at that level for at least 15 months before starting to ease!
The forecast and the rate rise, and promise of more to come, makes the RBNZ the first central bank to openly forecast that its tightening of monetary policy will plunge the NZ economy into a shallow recession. That’s real independence for you.
The UK is already in recession because of a combination of rising inflation, energy prices, political incompetence and weakening demand on top of rising interest rates.
Wednesday’s 75 basis point rise in NZ came after five half a per cent rises and a 0.25% tester at the start of the tightening campaign earlier this year. No mucking around across the Tasman. And if this fails, a 1% rise early in 2023?
NZ consumer inflation is running at 7.2%, not that much different to the 7.3% reading in Australia for the third quarter. NZ jobless rate, 3.3%, not much different to the 3.4% for Australia.
And yet the RBNZ saw the need for a bigger rate rise after that rapid succession of half a per cent jumps.
From one view it looks as though Kiwi inflation is proving harder to control than in Australia, but from another it could mean the Kiwi central bank is struggling and perhaps should have followed the Fed and stepped up to 75 point rises much earlier.
The RBNZ’s monetary policy committee said in Wednesday’s statement that the Committee “agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium-term. Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.”
“In New Zealand, household spending remains resilient, especially considering the rise in debt servicing costs, the fall in house prices, and low levels of consumer confidence. Employment levels are high, and income growth and household savings are supporting spending. The rebound in tourism is also supporting domestic demand.
“The productive capacity of the economy is being constrained by broad-based labour shortages, and wage pressures are evident. Aggregate demand continues to outstrip New Zealand’s capacity to supply goods and services, with a range of indicators continuing to signify broad-based inflation pressure.
“Committee members agreed that monetary conditions needed to continue to tighten further, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1-3 percent per annum target range. The Committee remains resolute in achieving the Monetary Policy Remit.”
Even to the point of driving it into a recession next year? Yep, the RBNZ, in its final monetary policy statement for the year, says the country will suffer one in 2023-24.
The recession will stretch into 2024 with four consecutive quarters of mild GDP decline, starting in the September quarter, followed by two more quarters of zero growth.
Inflation is forecast to peak at 7.5% this quarter and in the first quarter of 2023 before easing to 5% by the end of next year.
