Adrian Orr, Governor of the Reserve Bank of New Zealand

The Reserve Bank yesterday redefined election year.

 The Bank raised the Official Cash Rate to two per cent but is forecasting more rises to peak in June 2023 at 3.9 per cent.

But what will make Labour’s election campaign team nervous is that it expects that 3.9 per cent rate to continue through to June 2024 right through 2023.

Those rises will raise mortgage payments and hit household budgets as they slow the economy.

And what will make it worse for Labour is that the Bank is partly blaming Grant Robertson’s budget last week for what it calls “very high” Government spending and the impact that will have in stimulating inflation.

Overall then, the Bank may have inflicted a very difficult year on the Government.

The OCR rises are intended to bring inflation down below the Bank’s upper target limit of three per cent.

But it doesn’t see that happening till December 2023, probably three months after the election.

Though Reserve Bank Governor Adrian Orr yesterday insisted the economy could absorb the impact of the OCR rises without going into recession, many commentators do not agree with him.

Trading banks last night were skeptical about the move with most wondering whether the Bank had gone too far.


Kiwibank said the RBNZ wanted policy “to be tight, very tight.”

“The RBNZ predicts a 4% cash rate next year. That’s high. And we think it’s too high.”

But Orr defended the tough line.

“We’ve always talked about least regrets; the future is uncertain, what can we do — at least try to steer away from the worst possible outcomes,” he said.

“For us at the moment, that least regrets would be to have done too little too late.

“And at that point, inflation expectations are just continuously rising, and the task of putting inflation back to within its range becomes incredibly costly.

“So that’s why we have risked  doing too much too soon rather than risking doing too little, too late.”

But doing so much so soon — and for over a year — will have an impact on the domestic economy. Obviously mortgage interest rates will rise, probably up to six per cent. That will reduce the spending power of households by two hundred dollars  or more a month in many cases.

But Orr said that the OCR levels the Bank was talking about had already been taken into account by the trading banks when making lending decisions.

“The levels that we are talking about are very commensurate with the levels that retail banks have been using to justify the mortgages they have been offering over the last 12 to 18 months,” he said.

“So this type of six per cent nominal mortgage interest rate has been the level at which banks have been stress testing their customers on a consistent basis for some time.

“Now, I say that that will be for highly indebted borrowers.

“Of course, there will need to be some belt tightening, but that is the purpose of stress testing the lending before it’s made to the customers.”

In the Monetary Policy Statement released yesterday  the Bank said that over half of the total mortgage debt was due for repricing during 2022.

That means the OCR decision will impact broadly and as the Statement said higher mortgage rates will filter through to larger mortgage payments for many households over the coming year.

The Bank’s mandate requires it to use the OCR to manage demand in the economy so that inflation stays between one and three per cent.

Currently it is running at 6.9 per cent but the Bank is forecasting that to be a peak. Nevertheless Orr said the bank’s Monetary Policy Committee was “resolute” in its commitment to ensure consumer price inflation returned to within the 1 to 3 percent target range.

The Kiwibank economics team, in a commentary, noted the use of the word “resolute” and said the big  surprise in the statement was the extent of work the RBNZ was prepared to do to drive down demand to rein in inflation.

“Households will bear much of the pain from rising interest rates as the cost of servicing the recent splurge of debt grows,” the commentary said.

“The question is: how well will households cope facing mortgage rates that could near 7% and house price falls?

“Ongoing aggressive tightening risks a hard landing for consumers and the economy at large. “

And that is the danger for the Government now.

National were quick to sheet the blame for the inflation and the OCR rise home to the government.

“We’ve known since last year – well before the Russian invasion of Ukraine – that New Zealand had an inflation problem, but the Government’s only response has been to put more fuel on the fire with more spending,” said Finance spokesperson, Nicola Willis.  

“Now the Reserve Bank has no choice but to increase the OCR, pushing up interest rates across the whole economy and creating more pain for mortgage holders.”

And last month Orr appeared to agree with that line of argument.

In a recorded interview with the IMF’s acting director of its Asia-Pacific department, Anne-Marie Gulde-Wolf, he said the challenge in front of central banks was how did they tighten their monetary policies to constrain inflation expectations without creating a recession?

 “I would say that central banks aren’t going to achieve their mandates on their own; low and stable inflation and maximum sustainable employment.

“We are going to need support.

“Central banks are going to have to communicate very, very clearly about our purpose and why we are looking to lift interest rates in the current environment.

“We’re going to have to be very clear with our fiscal authorities around what we are doing and how they could assist around more targeted effective fiscal policies.”

But yesterday Orr was offering a more complex analysis of the causes of the inflation.

“On the global side, oil prices and their pass-through to domestic petrol prices have played a particularly large role in the recent) increase in tradables inflation,” the Statement said.

“Margins for refined oil products have risen significantly and are expected to contribute to high fuel price inflation in the near term.

“Food prices in New Zealand have also been increasing recently, in line with rising food prices around the world.

“Tradables inflation is much higher than was anticipated a year ago, reflecting the series of shocks from the war in Ukraine and ongoing COVID-19 lockdowns in China.

 “Domestically, construction and other housing-related prices have made the largest contribution to non-tradables inflation.

“Construction and housing- related prices have also risen much more than expected a year or so ago.

“This reflects both stronger-than-expected underlying domestic demand and shortages of labour and building materials.”

Nevertheless the Monetary Policy Statement also said demand had been resilient in the New Zealand economy in part because Government spending, “as outlined in the 2022 Budget, is very high.”

The ANZ’s chief economist, Sharon Zollner and Senior Strategist, David Crow, in their commentary said there was plenty of scope in the Government’s fiscal strategy to lift spending again from Budget 2023.

“Reading between the lines, and given the RBNZ’s assessment of extreme capacity stretch in the economy (which is hard to disagree with), it appears that the RBNZ does deem it necessary to “make room” for high Government spending<” they said.

“And if things pan out as forecast, that suggests the costs of fiscal expansion are not only the costs associated with servicing higher government debt, but also a higher-than-otherwise interest cost on private sector debt held by businesses and households.”

Expect to hear a lot more about that from National.

About the ebst Finance Minister, Grant Robertson, can hope for is that Orr’s “resolute” action yesterday and probably another 50 basis points hike in July do the job and bring inflation down faster than the forecasts.

Otherwise what National calls the “squeezed middle” could become very vociferous next year in the runup to the election.