Orr lays down gauntlet
Everyone is being asked to rein in their spending to help slow inflation, and that includes the Government.
Reserve Bank Governor Adrian Orr told Kiwis yesterday to ‘‘think harder about your spending’’ as the bank raised the official cash rate by an unprecedented 75 basis points, to 4.25%.
‘‘Inflation is no-one’s friend,’’ he told the country.
While most people are aware inflation is persistently hot and labour supply issues remain a major problem for many businesses, the data released with the latest official cash rate painted a worse picture of what lies ahead than some might have expected.
Household spending has proved more resilient than many predicted, and tourism has returned more strongly. While that is normally good news, it means the Reserve Bank has to work even harder to get inflation back down from more than 7% to its target band of 1% to 3%.
The bank now predicts the official cash rate will peak at 5.5%, although some economists say it may need to reach 5.75%.
Orr said New Zealand would go through four quarters of recession, starting in June next year, as the central bank battled to take the heat out of rising prices. Its efforts were likely to push unemployment to a peak of 5.8%, it predicted, up from its last prediction of 5%.
Infometrics economist Brad Olsen said yesterday’s statement indicated it was more likely the economy was headed for a hard landing than the soft one some had hoped for.
‘‘At the start of October people were thinking maybe things have turned a corner, maybe we’re in a better position. This statement and the recent data show we’re not done yet.’’
He said, while ‘‘no-one wants’’ a recession, the Reserve Bank was willing to sacrifice a substantial amount of economic growth to achieve its inflation goals. A recession was what was required to bring down demand.
Olsen also said the bank had sent a ‘‘stark’’ message to the Government to rein in its spending to help get inflation under
control.
Olsen said the Government needed to be more frugal rather than make wholesale cuts, and consider whether its hiring might be contributing to a labour shortage that was stoking inflation.
‘‘Demand is outstripping supply across the economy and government is contributing to that,’’ he said. ‘‘Something’s got to give.’’
Olsen said people must cut back their spending. ‘‘That’s the way that we will get inflation down.’’
While people may think they couldn’t make a difference as one person or one household, private consumption was a big part of the economy, making up about 60% of economic activity, he said.
However, debate is beginning to build over whether the Reserve Bank may have gone too far in its scramble to hose down inflation.
ASB chief economist Nick Tuffley described the central bank’s latest monetary policy statement as ‘‘very hawkish’’, noting it had discussed the option of a 100bp hike.
ANZ chief economist Sharon Zollner also said the Reserve Bank’s statement had been ‘‘even more hawkish than we expected’’.
Council of Trade Unions economist Craig Renney said there was a chance that the Reserve Bank was talking up how bad things were going to get as a way to slow the economy and do some of the work that interest rates would otherwise have to do.
Renney also said the Reserve Bank’s language had been hawkish. ‘‘We’re heading into much choppier economic waters.’’
But he said New Zealand was in a good position internationally. ‘‘Unemployment is low, inflation despite being high is relatively lower than many comparable jurisdictions . . . our economy is 5% larger than when Covid struck. ‘‘If we were doing this in the UK their inflation is in double digits and unemployment is forecast to increase rapidly.’’