Reserve Bank Governor Adrian Orr with his Chief Economist, Paul Conway, in front of Parliament's Finance and Expenditure Committee yesterday

The Reserve Bank has run head-on into the dichotomy that its dual inflation-employment mandate presents.

On the one hand, it must meet its inflation target by continuing to slow the economy, even though that might mean it undermines its other mandate to support maximum sustainable employment.

It is now forecasting that the Official Cash Rate (OCR) will be 5.5 per cent by the September quarter of next year.

That means it has got another 1.25 per cent to go, and with half of the country’s mortgages up for renewal before then, the impact in terms of household spending is likely to be massive.

The Bank is forecasting those interest rate rises to raise unemployment from 3.6 to 5.7 per cent by the end of 2025.

Ironically much of the force pushing inflation is coming from wage increases driven by labour shortages driven in turn by the downturn in immigration during Covid and now, the Government’s immigration reset.

Appearing before Parliament’s Finance and Expenditure Committee yesterday, Reserve Bank Governor Adrian Orr put it bluntly; it was bad as it could get on the labour front.

“Without doubt, labour has never been more scarce,” he said.

“Looking back across the economic, modern economic history of New Zealand, the employment participation rate is at a record high level.

“Unemployment is at an incredibly low role, and we must have a list of indicators in the labour market, and they are all at or near record levels.


“It’s a combination of previous reliance on ongoing net immigration into the economy, and the absence of that is constraining the demand, the productive capacity of the economy.”

But he warned that immigration contained within it its own economic problems.

 “If we hypothetically suddenly expanded the labour force by 10% from external migration, that would bring us increased skills and supply capacity, but it would also bring increased demand with households, housing, and so forth.

“So in the long run, supply of labour helps; in the near term, it can be offsetting between both supply and demand capability.”

Willis picked up the theme again during Question Time in Parliament, asking Finance Minister Grant Robertson whether Orr was right about immigration.

His reply suggested both she and Orr were having an impact.

“Immigration is an area where I know that New Zealanders are looking to see some improvement in terms of the number of people who can come in for jobs,” said Robertson.

He went on to say that employers were in a very competitive global environment, which made it tough to get workers.

And then, he indicated that the Government might be open to more changes to its immigration settings.

“We will continue to look at our immigration settings so that they can support the workforce that we need in New Zealand,” he said.

Orr had earlier told the Select Committee that when he met with central bank counterparts overseas, labour force issues were the number one topic.

“Vacancy rates are vacant positions for every one unemployed person across most of the OECD countries,” he said.

“So you can see that even if demand slows, it doesn’t necessarily mean a rise in unemployment.

“It may mean that some of these vacancies actually get filled.”

Interestingly this is leading him to forecast some unusual aspects of the recession, which the Bank is picking to emerge during the second quarter of next year and continue through the next four quarters.

“There will be a likely rise in unemployment, but it may be a job-rich slowdown because of the severe lack of labour in the economy at the moment,” he said.

“Labour costs are actually lagging behind inflation at the moment; same job, same employer.

“People are increasing household incomes by working additional hours or changing jobs, changing employers or getting promoted.

“And it’s that latter part, that high dynamic churn that is going on in the labour market, that could mean it could be an employment-rich recession.”

POLITIK Opposition MPs, Nicola Willis, Andrew Bayly, Simon Watts and Damien Smith at the Select Committee.

But the Bank’s Chief Economist, Paul Conway, told the Committee there was one sector that would feel some pain next year.

 “In terms of our projections, we see a significant slowdown in the residential construction space,” he said.

“House prices continue to edge downwards. Interest rates are going up. So we see that slowdown as part of what’s going to slow spending in our economy in terms of the number of people that work there,” he said.

“One thing that we learned from the pandemic is that the New Zealand labour market and New Zealand workers are very good at switching between industries.

“We had a tourism sector decimated in those early COVID years, and a lot of those people found jobs in other parts of the economy.

“So, yes, we think it is going to get a bit tougher for the building sector.

“Whether or not that flows into increased unemployment or not remains to be seen.

“There’s a reasonably good chance that Kiwis are quite adept at shifting their industry, their employers.”

Even so, the Bank’s projections show it expects annual unemployment rates to move from 3.6 per cent early next year out to 5.7 per cent by the end of 2025.

That shows up the way, in a sense, that the Bank’s formal mandate is dichotomous.

On the one hand, it must keep prices stable within targets agreed with the Government while at the same time it must support maximum sustainable employment. 

The current conditions are a real test of that where the Bank is “deliberately trying to slow aggregate spending”, as Orr told the Committee.

But it raises the question as to what “maximum sustainable employment” is because although the Bank has numeric inflation targets to meet, it has no numbers to guide its employment policies.

Green MP Chloe Swarbrick asked Orr to define “as clearly as possible” what he defined as maximum sustainable employment.

“So at this point in time, rather than give you a level, I’ll give you a word explanation, and it’s that level of employment that is neither putting upward or downward pressure on inflation,” he said.

“So it’s a wonderful, sweet spot.

“Our role is to support maximum sustainable employment, not to target it. We target inflation; we support maximum sustainable employment.

“We use a range of indicators to highlight where we think employment currently is against some sense of that sweet spot of maximum sustainable employment.”

There is a suspicion among some commentators – and the Opposition — that had the Bank not had the employment mandate it might not have stimulated the economy so much during Covid and might not have been, even by its own, admission slow to raise the Official Cash Rate to counter inflation back last year.

Swarbrick asked Orr whether he would have done anything differently over the past two years if he had not had the dual mandate.

“No is the answer,” he said.

“We haven’t come across any trade-offs of employment versus inflation. There is no conflict.”

Except that possibly next year, as the country heads into recession, there may be a conflict as interest rates stay high to control inflation and unemployment then rises with them.

What  Orr made abundantly clear to the Committee was that he was absolutely committed to getting inflation down.

“Inflation is nobody’s friend, and it leads to nothing other than significant economic costs to the economy,” he said.

“I do want to reaffirm the committee’s absolute commitment to and confidence in getting inflation back to within the target range.”