Orr admits deliberate recession being created

‘‘The power is in the hands of the people. You know, if you just start behaving, ‘1% different’ around inflation expectations and wage growth that makes our job easier.’’ Reserve Bank governor Adrian Orr

The Reserve Bank is deliberately engineering a recession to rein back inflation after being slow to raise interest rates, Reserve Bank governor Adrian Orr admitted to a select committee yesterday.

But he forecast the 1% decline in the economy that the central bank is predicting could be ‘‘job rich’’ and said the country was relatively well-positioned internationally.

The Reserve Bank raised the official cash rate by 75 basis points to 4.25% on Wednesday and surprised economists by forecasting the rate would peak at 5.5% next year while also predicting a further rise in inflation and a year-long recession, beginning in April.

The bank forecast that official unemployment would climb to 5.7% in 2025, from 3.3% now.

Orr told Parliament’s finance and expenditure select committee that it was correct that the Reserve Bank was engineering a recession, saying it was deliberately trying to slow spending in the economy.

‘‘There will be a likely rise in unemployment, but it may be a job-rich slowdown because of the severe lack of labour in the economy at the moment,’’ he said.

‘‘If we are successful, we slow down and inflation comes out, it would mean that ‘per capita’ consumption is still in real terms at the levels pre-Covid in 2019 and participation in employment is still very high.’’

But commenting further on the recession risk, Orr said the power lay in the hands of the public, who could reduce the need for an economic contraction if they collectively cut their spending and assumed inflation would fall, for example when negotiating pay rises.

‘‘The power is in the hands of the people. You know, if you just start behaving, ‘ 1% different’ around inflation expectations and wage growth that makes our job easier. We don’t have to pay that cost.’’

Orr agreed New Zealanders would be paying a price through higher inflation and higher interest rates for monetary policy being too stimulatory for too long, simply stating ‘‘yes’’ when asked whether that was the case.

‘‘There will be some households who need to be talking very quickly with the banks around making sure they have strong relationships.’’

Those conversations could see some defer their mortgage payments or switch to interest-only loans, he said.

The biggest surprise since its monetary policy statement in August, when the bank was forecasting the OCR to peak at only 4%, was the persistence of global inflation, he said. But the bank was also seeing pricing pressures domestically everywhere ‘‘in particular, because of labour shortages’’, he said.

‘‘Without doubt, labour has never been more scarce looking back across modern economic history in New Zealand.’’

National Party finance spokesperson Nicola Willis questioned Orr as to whether relaxing immigration rules might help address that, but Orr suggested it could not be a quick fix.

‘‘If we suddenly expanded the labour force by 10% from external migration, they would bring increased skills and supply capacity, [but] they would also bring increased demand with them as well, for housing and so forth.

‘‘In the long run the supply of labour helps,’’ but in the near term the increases in supply and demand could ‘‘offset’’ one another, he said.