Cam Slater: Reserve Bank Slams on the Brakes

The Reserve Bank yesterday announced a 50 basis points hike in the Official Cash Rate, moving it to 4.75%. Your mortgage, overdraft, equipment leases, and credit card costs just ballooned again. The Reserve Bank is trying to do two main things: stave off a recession, and defeat inflation. You can’t do both at the same time, but that is what they are trying to do.

The Reserve Bank has raised the official cash rate by 50 basis points to 4.75%, saying it is too early to assess the monetary-policy implications of Cyclone Gabrielle.

Financial markets and most analysts had assumed ahead of the announcement that a 50 basis point rate rise was most likely, with many warning that the damage caused by Cyclone Gabrielle would give fresh legs to inflation while also increasing the risk of a recession.

The Reserve Bank’s monetary policy committee said it was too early to accurately assess the monetary policy implications of Cyclone Gabrielle “given that the scale of destruction and economic disruption are only now becoming evident”.

“The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined,” it noted.

It said its current assessment was that over coming weeks, prices for some goods were likely to spike and economic activity would be weaker than previously expected.

Export revenues would also be negatively impacted by the storms, it said.

Stuff

Raising interest rates constricts the supply of cash. That causes recessionary pressures. It also makes producing goods more expensive, adding inflationary pressure.

The damage from Cyclone Gabrielle is astonishingly large, not just in the widespread damage to public infrastructure, but also the catastrophic destruction of the means of production and therefore the local economy in total across a wide geographic area.

The impact on exports is massive with a potential loss from the rural export sector measured in multiple billions. That is money that isn’t going to flow down into the local economy by way of the service centre towns. The very nature of the destruction means that the East Coast of the North Island is highly likely to suffer a catastrophic economic depression, even if the government pours billions into the recovery effort. Those billions will exacerbate the inflation problem.

The economy doesn’t have the resilience to replace that which has been lost. In housing there is going to be a massive problem with residents of destroyed houses not wanting to re-build in the same area that has been devastated. There is going to be a need for a massive relocation effort that is actually beyond the means of the building industry and government to satisfy.

That activity, along with the necessary repairs to infrastructure like roads and bridges is going to create shortages in a market already constrained by the economic ravages of stupid lockdowns worldwide. Bitumen is going to be at a premium, leading to long delays for other projects around the country. Aggregates will be in short supply too, constrained by extraction limits in place under the Resource Management Act. Building supplies will suffer the same fate.

With the loss of export income, and the degradation of cash flow on business the economy is set for a serious contraction that may well lead to a recession or worse. We are already teetering on the verge of recession. A depression would really hurt.

The Government think they have the election won with the recovery effort. But I wouldn’t be so sure. If they screw it up, and let’s face it they screw up most things, then such an outcome is far from assured.

But one thing is for sure, we are in for some serious hurt, economically. That will add to the pain and suffering being felt on the East Coast.

We can now be under no illusion, given how long people have been without support, power or potable drinking water, and given the wanton destruction of the roading network, that we no longer live in a first-world country.

Cam Slater is a New Zealand-based blogger, best known for his role in Dirty Politics and publishing the Whale Oil Beef Hooked blog, which operated from 2005 until it closed in 2019. This article was first published HERE.