Pressure on Govt after OCR decision
Surprise OCR call swings focus to Govt spending
The Reserve Bank’s decision not to cut interest rates further was not the only surprise yesterday — it also stopped calling for the Government to help.
Rather than suggest the bank no longer wants more spending to boost growth, the central bank may already be assuming the Government will loosen the purse strings.
Back in September governor Adrian Orr made a series of statements suggesting there was more scope for the Government to spend, both in an interest-rate review, then in more detail in a speech. As interest rates fall uncomfortably close to zero, economic
growth is also sagging as is inflation.
While the coalition has, so far, stuck to its target to reduce debt, the governor was effectively asking for help to achieve his inflation targets, hoping Finance Minister Grant Robertson would spend more.
But this week, the calls for more spending were dropped, or at least the language in the Reserve Bank’s statement returned to normal.
“You don’t have to keep shouting,” Orr told reporters.
The message had not changed, Orr said, but his statements on the scope to invest more had been repeated so often, and the conditions were so ideal, that if the message was going to be received, it would have already.
“They will do what they will do, and we’ve made our message clear.”
Brad Olsen, a senior economist at Infometrics, said the tone of the bank’s statement on fiscal spending, its expectation economic growth will pick up next year and the governor’s response to questions suggested that the Reserve Bank’s working assumption was that more spending was on the way.
“It sends a pretty clear message to the Government that not only does the Reserve Bank need to come through but it’s actually banking on it . . . The Reserve Bank has effectively locked that [expected extra spending] in.”
While the Reserve Bank pared back its growth expectations for the next two years, economists at ASB said the forecasts still looked “rosy”.
Orr made it clear at his press conference that the need for fiscal spending had not changed, nor had the conditions.
New Zealand had “very well identified fiscal demands and needs” as well as a Government with a healthy balance sheet and interest rates meant there was money looking for a place to be invested,” Orr said.
“This is, if needed, a time to be fiscal spending. It’s not like we are looking for money to put into some place that we are looking to spend”.
Whether the Government has decided to respond to a cooling economy may become clearer when Robertson delivers the half year update on December 13.
If the Government is looking to use investment to push the economy forward and get inflation going, it should have developed plans some time ago.
There have been many calls for the Government to use the current climate to address a perceived infrastructure deficit.
But there was a warning from one of Orr’s predecessors that infrastructure spending may take too long to solve the problem.
Alan Bollard, who spent a decade as Reserve Bank governor and who now chairs the new Infrastructure Commission, said this week that infrastructure projects which were described as “shovel ready” were nothing of the sort.
They were ready to contract, meaning it would be a year before earth is turned.
“There is a bit of a problem if you think . . . you can use infrastructure for fiscal stimulus in the short term,” Bollard said this week.
“You can use it in the medium term, but in the short term it still takes a while to get things going. By the time it [happens], it’s too late and you’ve got too much pressure on the economy.”