Bank lines up Labour’s nightmare scenario

It seemed like such a good plan.

At the start of the year Labour figures and senior MPs had the following general sense of the year: there would be a few months of drudgery and sickness as Omicron washed through the community, but the borders would open, tourism numbers would increase. Inflation – which was then only 5.9% – would be coming down and the Government would be getting into a nice position by Christmas for an election year which would also feature the Fifa Women’s World Cup.

The news delivered by the Reserve Bank of New Zealand yesterday blew that out of the water. Not only was the official cash rate bumped up a record .75% to 4.25% but the bank is now forecasting a ‘‘shallow’’ but year-long recession beginning the second half of next year as a precursor to start bringing inflation – the general level of prices rises – to back between its mandated 1-3% target range.

The bank was decidedly more hawkish than it was in August and is now predicting the cash rate will peak at 5.5% by next year. But Reserve Bank governor Adrian Orr and his Monetary Policy Committee – all of whom were in attendance at his press conference – have signalled that they will do what they can in their power to drive the rate down.

Notwithstanding that no borrower likes higher interest rates, the spectre – now likely – of nearly 8% mortgage rates on election day next year, will be a

For Labour, this is potential disaster territory heading into election year.

sobering one for many voters. Orr, who has come under trenchant criticism from the National Party of late, must now be looking much more like their favourite Reserve Bank governor.

Interest rates haven’t been this high since 2008.

For Labour, this is potential disaster territory heading into election year – with a poll expected in November.

There are several reasons for this.

The first is that about 60% of households are due to refix their mortgages over the next year and will face a big hike in repayments.

Less disposable income means more belt-tightening and a focus on making ends meet.

The second is that, according to the RBNZ, inflation hasn’t even peaked yet. In fact, it is due to also peak next year and not come back to 1%-3% until at least 2024. That is more big price rises in the run-up to next year’s election.

It will take a pretty big about-face on a number of fronts for Labour to try to politically combat this next year, especially anything that will make a difference.

New Zealand is a fundamental supply constrained economy: the chief constraint being a lack of people.

Yet Labour has been mostly allergic to supply side reforms. The immigration system continues to be micromanaged and not open to the number of people New Zealand needs.

The key metric that Labour comes back to is unemployment which remains a very low 3.3%. It is not only strong, but inflation has meant that anyone who changes jobs is also getting a pay rise, even if overall, real wages are falling.

When asked about whether Labour was worried about all this going into an election year, Finance Minister Grant Robertson hewed back to familiar territory: this is being felt around the world, among our trading partners, and the clincher: ‘‘We supported New Zealanders through a really tough time and Covid-19, they know that we’ve got their backs when things are challenging.’’

This is clearly hope over experience from Robertson. Voters rewarded Labour handsomely for the first half of its Covid response – last election. It is an unfortunate truth of politics that politicians rarely get thanks for the last thing; people want to know what they are doing about the current one. It is also unclear the extent to which voters are blaming Labour for inflation or if they think National will do better.

Covid was also crisis management. Next year is unlikely to be. Instead employment will still be high, wages going up, but price rises will be grinding, getting workers will still be hard and Labour still won’t have any quick answers – because there aren’t really any.

None of this is to say that National will romp in or even that it is giving particularly compelling solutions.