Everyone thought the Reserve Bank would raise the OCR. ASB says it was 95 percent priced in. Even economists who believed the OCR should be held, so as not to kill the nascent recovery, were on record saying they thought the Reserve Bank would do it anyway. They expected it to make the wrong call and hike.
And yet it didn't.
It held the Official Cash Rate.
Now let me tell you why that was the right thing to do.
Yes, inflation is at 3.7 percent, which is well outside the target band and far too high. And yes, it is probably going to go even higher, potentially reaching 4.4 percent in the next inflation data release.
But the economic recovery is still too fragile to handle a hike.
I was in the Coromandel during the long weekend and bumped into one of the local business owners on the main street. We got talking about how things were going for his business. He said this past winter had been the quietest his business had ever seen.
And that's despite the GDP growth we are experiencing as a country right now.
That's because the growth is not being felt everywhere. It is in the provinces that make their money from exporting food but in places like Auckland and the Coromandel, which rely on Aucklanders spending money they don't have, it is still tough going.
What's more, the Reserve Bank is not only worried about what's happening domestically, it's also concerned about what could happen globally.
It is worried the AI bubble might burst. There could be a war that disrupts supply chains, a spike in fuel prices beyond current levels, or further instability in bond markets.
Any one of those things could trigger a sudden downturn. If that happens, we are going to be desperate for every bit of domestic growth we can cling to.
So the Reserve Bank is pausing.
It has already put a couple of hikes under its belt and is now taking six weeks to see how those increases filter through the economy and whether the economy can withstand another hike.
Now, at the risk of sounding like a broken record, can I just say once again how refreshing it is to have a serious, uncomplicated and calm governor in charge?
She instils confidence in her decisions, even when those decisions cause surprise or shock.
Heather du Plessis-Allan is a journalist and radio broadcaster who hosts Newstalk ZB's weekday Drive-Time Show – where this article was sourced.
3 comments:
The logic is flawed. Based on what might happen - sit still. That is like - someone might crash their car into me so I will stay at home with my head in the sand
More economic nonsense from du Plessis. Its legally incorrect to write "But the economic recovery is still too fragile to handle a hike" since Willis changed the RBNZ mandate to rule out considering the state of GDP when setting the OCR. Only inflation matters in her new legislation. Its 4 per cent and going higher since with an OCR of 2.75 per cent real rates are negative. The new Governor is grateful that Willis gave her the job and is returning the favour. Nothing more to it. All four members who voted for holding rates were appointed under Willis. Two of the three who opposed and voted to hike rates were appointed under Labour. The RBNZ is no longer independent. And when Orr was Governor the MPC apppointed under Labour printed tens of billions before election 2020 to help Ardern win. NZ has reverted to Muldoonism. Labour and National have become mutually unethical repugnant parties who've betrayed the trust of New Zealanders
The headline inflation figure leans heavily on imported costs, notably fuel. Strip those out and domestic inflation sits below 3%.
How could raising the interest rate drive down imported fuel prices?
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