Economists around the country were caught by surprise upon the release of inflation data this week.
While most anticipated it to stay stubbornly around the 7 per cent mark, the actual data showed the figure to be far lower, at 6.7 per cent.
This has raised serious questions about whether the Reserve Bank has simply gone too hard, too fast with its recent rate rises, which are continuing to pile pressure on the economy.
Speaking to The Front Page podcast, NZ Herald business editor-at-large Liam Dann said those working in economics remain split on whether things have gone too far.
“Most economists are sticking to the belief that we need one more rate hike of 25 basis points to take the OCR to 5.5 per cent,” Dann said.
“So even with this better-than-expected number, they still think we need to just put a cap on it [inflation]. But my fear is that we overdo it, and it affects people’s jobs and we have higher unemployment. If inflation is tracking down, then let’s just chill out for a while and let it wash through.”
The New Zealand Reserve Bank has been among the most aggressive in the world, raising rates at a time when other countries, Australia included, are holding steady.
Part of the problem is that the data being used by the Reserve Bank to make these decisions isn’t as current as it is elsewhere. Australia and the United States both report inflation data on a monthly basis, whereas we are still limited to quarterly numbers.
“The Australian Reserve Bank passed on the cash rate because they’d seen inflation come down. They were at 7.8 per cent at the end of December, but then they got to see a monthly number for January and February, showing it had dipped down to 6.8 per cent by February.”
Dann says there’s no guarantee that the New Zealand Reserve Bank would have paused on its recent rates rise, but better data could have at least informed the decision.
“We talk about monetary policy being a blunt tool, but we’re swinging that blunt tool in a less illuminated environment,” says Dann.
“To use a cricketing analogy, you’ve only got a choice between not playing a shot or going for a six – and we are playing in worse light than the Australians.”
So, where does this leave New Zealand? How bad could our recession end up being? And what does this mean for the political parties that have been campaigning on the performance of the economy?
Listen to the full episode of The Front Page to hear Dann dig into these issues.