Then, as it turned out, all the central bank and government stimulus were too much for the economy to handle, particularly at a time the movement of people and goods around the world was constrained by border restrictions and war.
So, boom – inflation took off.
The first phase of the country’s only proper strategy to curtail inflation is to clobber the indebted with high interest rates.
Who are the most indebted? The first-home buyers who clambered over each other to buy over-priced brick and tile units from which to raise their families and “secure their financial futures”, and property investors who wanted to make hay while the sun shone.
Those who bought property more than five or 10 years ago are likely doing okay, facing high rates on small mortgages, knowing their properties are still worth a lot more than what they bought them for. There’s less urgency for them to cut their spending to help the inflation fight.
The income-rich, asset-poor can likewise keep spending to the extent they can stomach paying $14 for a house wine at their trendy local.
The income-poor, asset-rich might need to pull back depending on whether their money is tied up in property or high-yielding term deposits for example.
Meanwhile the income- and asset-poor are in a bad way – a really bad way, to the extent the social problems borne from economic disenfranchisement are now widely visible.
This is of course a crude simplification of the situation. But as it stands, a small group of highly indebted are doing the heavy lifting in this inflation fight.
The next phase of the plan is for their pain to spread more widely; for more people across all the groups outlined above to lose their jobs, and for weaker demand to prevent businesses from raising their prices and giving staff pay rises.
The multiple-billion-dollar question is: How much bashing does the Reserve Bank need to do to achieve its goal?
How much does it need to lift the official cash rate (OCR) by, how long does it need to keep the rate elevated for, and how quickly can it bring the rate back down?
If everyone was equally affected by interest rate changes, and at the same time, answering these questions would be much easier.
But we aren’t. The impacts are uneven and take time to take effect as loan durations vary.
New StatsNZ data highlights the difficulty. It shows that on aggregate households are doing fine.
Yes, their net wealth fell by 2 per cent between the December and March quarters, but it was still 24 per cent above what it was directly pre-Covid.
Inflation has eaten some of this value. But by the March quarter, the Reserve Bank’s aggressive interest rate increases hadn’t come close to eroding the (paper) wealth its aggressive cuts created.
The fall, from when households’ net wealth peaked in the March 2022 quarter, was worth less than half of the increase from the December 2019 quarter.
As for the value of households’ disposable incomes, strong wage inflation and low unemployment saw this come off its peak in the March quarter, falling by 1 per cent from the previous quarter.
What about the borrowers bearing the brunt of high interest rates? All up, households’ interest payments were worth only 7 per cent of their disposable incomes – a lower portion than just before Covid.
Meanwhile, household debt (including for rental properties) was worth 168 per cent of disposable incomes – again less than pre-Covid.
Of course, it takes up to a couple of years for OCR changes to filter through the economy. The average interest rate paid on mortgage debt in March was only 4.7 per cent.
Nonetheless, the numbers show just how off-kilter the economy got in 2020 and 2021, and therefore, how messy the attempt to get it back to equilibrium could get.
If the Reserve Bank could influence inflation using a tool that affects people more evenly and with more immediacy than OCR changes do, things might be fairer and more predictable.
But doing so by adjusting tax rates, for example, would come with a whole set of different challenges.
So perhaps Winston Churchill’s comment about democracy applies to monetary policy.
That said, the imperfectness of our system can’t account for all our struggles.
The Reserve Bank clearly did too much to stimulate the economy. Let’s hope it’s applying the right amount of pressure to the brakes now.
Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
