Wednesday, August 17, 2022

Point of Order: RBNZ governor must curb inflationary pressures while keeping an eye on employment trends

Reserve Bank governor Adrian Orr has a lot on his plate at present. He is battling to hose down prices which have been rising faster than they have done for 30 years, while at the same time “maximising” sustainable employment.

It’s a task none of his predecessors had to undertake. Finance Minister Grant Robertson widened his remit to include full employment, but probably didn’t expect the job being put to the test so soon.

And, of course, Robertson’s future as finance minister will hang in the balance, particularly if inflation is still raging when electors go the polls next year.

Ironically, too, it was the government’s decision for the printing of money by the Reserve Bank as the country returned to something like normal after the Covid lockdowns, which stoked the fires of inflation.

Some might see elements of Greek tragedy taking shape.

Meanwhile the pundits are saying the RBNZ tomorrow is set to deliver a fourth consecutive 50-basis-point rise in the official cash (OCR), lifting it to a seven-year high of 3%, as it continues its all-out assault on an inflation rate which has reached a 32-year high.

It will be the seventh rise in the OCR since last October, the most aggressive tightening cycle since the current monetary policy system was instituted in 1999.

Radio NZ reckons the accompanying statement and forecasts will seek to reinforce the idea the tightening it is not yet complete while the NZ Herald’s Liam Dann sees the economy in a holding pattern while inflationary and recessionary forces grapple for ascendancy.

Over in the Beehive ministers will be hoping that price rises are past their peak as appears to have happened in the US.

But the Reserve Bank in this country in July talked of tightening “at pace” and some authorities believe inflation pressures are stronger than expected.

BNZ head of research Stephen Toplis, as Radio NZ reported, said for all the ructions on financial markets and economic numbers, little had changed of late.

“Once everything is thrown into the mix, the outlook for New Zealand inflation and the labour market is little changed from what the Reserve Bank was looking at when it delivered its July Monetary Policy Review or, for that matter, its May Monetary Policy Statement.”

The June-quarter inflation numbers, with consumer prices topping the RBNZ’s guess at 7.3%, blew away even the vaguest chance the central bank might contemplate easing back off the interest-rate brakes on the economy.

The RBNZ has a dual mandate from government – keep inflation in check, and maximise “sustainable” employment.

Toplis says by any measure it has under-achieved on the first, and overdone it on the second, with the unemployment rate at close to record lows and wages rising at the fastest rate in more than a decade.

ASB chief economist Nick Tuffley said:

“The domestically-generated pressures are set to remain for some time, with the labour market a key influence on how persistent inflation pressures will be.”

In the absence of an influx of foreign workers, or improved productivity, the RBNZ had to reduce demand in the economy, including the demand for labour, Tuffley said.

That would mean continued tough talk and economic forecasts to match, notably the projection of where the OCR might reach.

The RBNZ’s May forecasts implied the OCR sitting at 3.5% by the end of the year and possibly near 4% by the middle of next year, before the chance of rate cuts towards the end of 2024.

ANZ Bank’s chief economist Sharon Zollner says monetary policy takes time to feed through the economy,

“… but one thing’s for sure, with inflation so high … and wages rising so fast, under a least-regrets framework, the RBNZ can’t afford to make optimistic assumptions about the degree of effective monetary tightening it is delivering.”

So, there is a load of pain still coming, in the shape of rising mortgage costs for those who have paid high prices for houses in the past year or so, or who are looking at buying their first home.

Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton

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