‘Dramatic’ rate rises worry monetary policy observer

Aformer member of the Reserve Bank’s monetary policy committee says he believes the central bank has worked ‘‘way too hard’’ to dampen inflation and has increased interest rates too quickly.

The official cash rate has increased from 0.25% in August last year to 2.5%, taking home loan interest rates from as low as 2% to more than 5%.

Economist Rodney Dickens, who worked for the Reserve Bank in the 1980s, said there had been an 84% increase in the average mortgage rate in 16 months, compared to a 47% increase over five years the last time the central bank wanted to dampen inflation.

‘‘In an extremely short period interest costs have risen dramatically more already than was needed to cool inflation last time,’’ he said.

‘‘Considering this and it taking up to two years for changes in interest rates to impact on inflation, sound judgement points to a need to wait to see what impact the largest increase in interest costs on record will have rather than charge ahead with even more aggressive OCR hikes.’’

The Reserve Bank has forecast a 4% OCR peak this cycle. Economists had suggested it might hit its inflation targets before it needed to get that high, but news this week that inflation was running at an annual pace of 7.3% prompted some to revisit that.

Dickens said it would usually take a year for interest rate increases to affect gross domestic product (GDP) and another year to hit inflation.

‘‘With such aggressive increases in a short period of time, there’s no sense of thinking about what damage is this going to do. It runs a risk that they’re going to be a huge source of unnecessary volatility.’’

He said the Reserve Bank had over-reacted during 2020, when the Government’s policies, such as the wage subsidy, had been enough to help the economy.

‘‘It caused a massive house price boom, not just interest rates but temporarily removing the loan-tovalue restrictions. That caused a massive boom – when Covid came along they said they would keep rates low for the foreseeable future, no wonder people rushed out to buy like crazy.’’

He said he had been monitoring monetary policy for 30 years – ‘‘I’ve never seen anything as crazy as what they are doing now.’’

Leading indicators suggested a recession could be imminent, and confidence surveys have showed significant drops.

ANZ economist Miles Workman said it was ‘‘plausible’’ that the Reserve Bank had done enough already.

‘‘However, it’s also a plausible scenario that core inflation continues to accelerate, or remains uncomfortably high for too long if the Reserve Bank doesn’t deliver further hikes.

‘‘The current situation isn’t great but tapping the monetary tightening brakes too early, and then needing to hike more than otherwise later because inflation has been given more time to get under the nails of the economy, could be the bigger policy mistake than hiking too much and possibly winding some of that back later if needed.’’

The Reserve Bank has been approached for comment.