‘Significant risk’ bank will cause more pain
Debate is beginning to build over whether the Reserve Bank may have gone too far in its scramble to hose down stubborn inflation.
The Reserve Bank raised the official cash rate (OCR) by 75 basis points to 4.25% yesterday, but surprised economists by forecasting that the rate would peak at 5.5% next year, while also predicting a further rise in inflation, and a year-long recession.
ASB chief economist Nick Tuffley described the central bank’s latest monetary policy statement as ‘‘very hawkish’’, noting that it had discussed the option of a 100bp hike.
ANZ chief economist Sharon Zollner also said the statement had been ‘‘even more hawkish than we expected’’.
John Carran, an investment strategist and economist at broker Jarden, said there was a significant risk that the Reserve Bank could cause more economic pain than necessary.
Reserve Bank governor Adrian Orr said the bank’s monetary policy committee, which he chairs, agreed that the OCR needed to reach a higher level to ensure that inflation returned to within its target range of 1% to 3%.
Annual inflation was last measured by Stats NZ at 7.2%. The Reserve Bank is forecasting that it will rise still higher, to 7.5% in the December and March quarters.
Carran said the bank might be too ‘‘backward-looking’’, given the lag between interest rates rising and this fully hitting home on the economy.
The Reserve Bank appeared to be giving low weight to ‘‘clear signs global inflation pressures are easing’’, with sustained falls in commodity prices and shipping costs, he said.
‘‘There is a significant risk the
Reserve Bank over-tightens monetary policy, causing more economic pain than is necessary to sufficiently control inflation over the medium term.’’
Westpac acting chief economist Michael Gordon also queried whether interest rates needed to rise as high as the Reserve Bank was now forecasting.
Westpac was still forecasting that the OCR would peak at 5%, he said. ‘‘In our view, this remains sufficient to bring inflation under control.’’
BNZ research head Stephen Toplis said before yesterday’s announcement that if it was up to BNZ, it would have raised the OCR by only 50 basis points.
The Reserve Bank implied in its last monetary policy statement in August that the OCR would peak far lower, at 4%, and would remain at that level next year and throughout 2024.
But its new forecast implies that the OCR will reach 5.5% by the middle of next year, and stay at that level for about 15 months before starting to decline.
Inflation and unemployment have barely budged since the August monetary policy statement, but Orr said the fact that high inflation had lasted longer increased the risk that it would become ‘‘embedded’’.
The bank had no alternative but to actively reduce demand in the economy, he said, closing a media conference on the hawkish monetary policy statement by wishing everyone a ‘‘safe and sensibly spending Christmas’’.
The Reserve Bank is forecasting a ‘‘shallow recession’’ with four consecutive quarters of mild GDP decline, commencing in the three months to the end of June, and another six months of zero growth after that.
It is predicting that the economy will contract by a total of 1% over that period.