How quickly things change. Only six months ago the Reserve Bank was threatening to hike the Official Cash Rate again and squeeze the economy even harder.
There’s talk that a cut that big can’t possibly happen because doing so would be the Reserve Bank admitting it stuffed up its job and crushed the economy harder than it should have.
Truth is, we don’t have to wait for a 75-point cut to know the central bank stuffed it up. The evidence is already out there.
Inflation is back almost exactly where it needs to be. The 2.2% number out this week is achingly close to the mid-point of the bank’s 1-3% target band.
And yet our OCR is still sitting at 4.75%. That’s higher than the Australian benchmark interest rate, which is 4.35%. The comparison is relevant because Australia’s inflation is not anywhere near where it should be. Their consumer price index is sitting at 3.8%.
So somehow a country (New Zealand) that has inflation right back down has an OCR higher than a country (Australia) where inflation is nearly twice where it should be. That tells you our OCR is too high.
The Reserve Bank clearly realises this. That’s why it’s cutting faster than it thought it would need to, even as recently as August.
But we’re in trouble because even if the RB cuts by 75 basis points next month, it won’t immediately rescue the economy. It takes as long as a year for the OCR to fully wash out. That means this too-high OCR at 4.75% will still be squeezing parts of the economy in October next year.
Herald cartoonist Rod Emmerson's take on the Reserve Bank's taming of inflation.
The Reserve Bank doesn’t have the benefit of arguing that mistakes happen.
The staff in that place are not people on the minimum wage. The bank doesn’t have the kind of room for error your average worker does.
If a supermarket worker over-stuffs a grocery bag, the bag rips and gets replaced. If a chef overcooks a steak, they have to cook another one. If the Reserve Bank over-squeezes the economy, Kiwis lose their jobs, houses and businesses.
That’s what’s happened. We have had essentially two years of recession in this country because of the Reserve Bank deliberately engineering a slowdown.
We have seen shops and restaurants in our neighbourhoods close, people sell their homes for a loss and unemployment rise. If you accept that the Reserve Bank squeezed too hard, then you accept it hurt more Kiwis than it needed to in order to get the job done.
What makes all of this worse, of course, is that the bank overdid the squeeze only because it first overdid the money pumped into the economy.
Stuffing it up in one direction is tragic. Stuffing it up in both directions is incompetent.
The Reserve Bank needs to get back to doing its job properly. Enough identifying as a tree. Enough obsessing with trying to strike a gender and ethnic balance on its board. As former senior staffer Geof Mortlock told Parliament this week, the bank needs more knowledge, skills and importance on its board as a “matter of urgency”.
Being human, the bankers at Te Pūtea Matua (as they like to call themselves) may well resist going for a full 75-point cut in November because they realise it would be an admission of guilt.
They needn’t worry about conveying that message. We already know they stuffed it up.
