Commentators making comparisons between our rising Official Cash Rate (OCR) and Australia’s are missing some important context.
Last week, the Reserve Bank increased the OCR by 50 basis points to 5.25 per cent, shocking economists and politicians who had expected a softer increase.
However, NZ Herald business editor-at-large Liam Dann says that this should not have come as a surprise.
“The Reserve Bank’s position had not changed from February. So in actual fact, they did exactly what they said they were gonna do in February, and they’re still on track to take the official cash rate up as far as 5.5 per cent, quite possibly, which was their last forecast.
“What had happened in the interim was that those international money markets had moved down a bit, so we’d sort of seen the economists and the commentators and the journalists all sort of soften their position. But it was never the Reserve Bank that said that.”
Why is New Zealand not following Australia?
Speaking to The Front Page, the NZ Herald’s daily news podcast, Dann says that the controversy over the rise came after Australia paused their OCR the same week that ours went up, but the situations in our two countries are not similar.
“Australia hasn’t had the wage spiral because they haven’t had some of the labour shortage issues that we’ve had with closed borders. I mean, they had their borders closed, but it wasn’t quite as tough. They’ve had immigration come back a bit quicker.
“Their inflation rate seems to be coming off a little bit more clearly than ours, so they had room to pause where maybe our bank didn’t. But having said that, they may have to hike again. We don’t know. It will depend a lot on how things go in the next few months.”
One thing New Zealand does have over Australia is that they get inflation figures every month, while New Zealand only gets theirs every quarter. Dann says it means we have to wait for “big reveals” which can be out of date by the time they come through.
He says that while the Reserve Bank would not necessarily say they are engineering a recession, their forecasts do show that these measures will see us enter a period of no or backward growth, for “a few quarters in a row”.
“So, quite a long period in order to get on top of it. In terms of sticking to their guns, this is just bringing it home that they can’t really see a way to get through this.”
How long will inflation pain last?
As for how long this inflation pain will last, Dann says that it all depends on if the Reserve Bank’s strategy works.
“If it works, that they hit this harder at the front end with these higher rate hikes, then some economists see it being cut again by the end of the year, potentially.
“That may be a little bit like wishful thinking, but the expectation is that it would be coming down through 2024, that we would have inflation under control.”
He says that for those thinking about 18-month or two-year fixed-rate mortgage terms, they probably will have peaked by then, but it will be tough on those with mortgages, particularly younger people with newer mortgages.
“It’s a real short, sharp shock treatment, I think is what we are going for. Whether it pays off, we’ll have to wait and see.”
Listen to the full podcast for more on what the OCR rise means for New Zealanders, and if there will be any further action from the Government.