The Reserve Bank yesterday handed Labour an economic weapon to hit National with as it goes into the election campaign.
The Bank raised the Official Cash Rate by .25 per cent to 2.75 per cent.
Though that is minuscule alongside the Reserve Bank of Australia’s Cash Target Rate of 4.35 per cent or the US Federal Reserve’s Federal Funds Rate of 3.75 per cent, the New Zealand rate is set against record unemployment and only vague signs that the situation might change.
But the Bank is adopting a softer tone about the prospect of rises on October 28 (nine days before the election) and December 9.
“We do think that it is likely there may be a future OCR increase, but the timing is highly uncertain,” the Governor, Anna Breman, said yesterday.
Nevertheless, Labour and the CTU will measure anything the Bank does against unemployment figures.
Labour’s Fiscal Strategy calls for the reinstatement of a dual mandate for the Bank which would require it to consider the impact of any interest rate change not only on inflation but also unemployment.
It’s easy to see where the pressure for Labour to do that came from.
Combined Trade Unions (CTU) President Sandra Grey was quick yesterday to oppose the Bank’s decision.
“The Reserve Bank’s decision to lift the Official Cash Rate to 2.75 percent will make life harder for the 171,000 New Zealanders already out of work,” she said.
“New Zealand has been through a prolonged economic downturn, in large part because of the Reserve Bank’s decision to keep the OCR too high for too long through 2023–24.
“Raising it again repeats that mistake.”
The problem facing the Bank — and Labour and the CTU — is that New Zealand has a two-speed economy.
There is a buoyant economy in the South Island driven by the export sector and a much more lacklustre service-sector-oriented economy in the North Island.
The electoral problem for National is that there are only 16 general electorates in the South Island but 48 in the North.
The Bank’s Monetary Policy Committee outlined the difference in the minutes of its meeting.
“The Committee noted that economic conditions remain favourable for households and businesses exposed to the export sector, contributing to a recovery in business investment,” the minutes said.
“Resilient trading-partner demand and strong export prices are supporting activity in the South Island and some North Island regions.
“The Committee assessed that positive spillovers from the export sector into the broader economy have been limited.
“Households and businesses more exposed to the domestic economy continue to face challenging conditions.
“Employment growth has not been sufficient to fully absorb new entrants into the labour market, and unemployment is elevated, particularly in Auckland and Wellington and for youth and the long-term unemployed.
“Some households are moving to regions with stronger labour markets as part of this economic adjustment.”
The problem with the labour market seems to be that while new jobs are being created and new entrants are picking those jobs up, moving the unemployed into jobs is slow.
The share of workers moving from unemployment to employment remains historically low.
“While the share of workers becoming unemployed is relatively low (the job separation rate), the very low share of unemployed people finding employment (the job finding rate) is contributing to higher youth unemployment and longer spells of unemployment,” the Bank said in its Monetary Policy Statement.
“The unemployment rate for people aged 15 to 24 years has increased to a similar level to that following the Global Financial Crisis, while the share of the labour force unemployed for a year or longer is around its highest levels since 2000.”
While the CTU blames the Bank for this situation, Labour (predictably) blames the Government.
Labour’s Finance spokesperson, Barbara Edmonds, produced a statement attacking the Government for its overall economic management but totally failed to mention her party’s promise to reinstate the dual mandate.
Grey was much more on point: “A higher OCR will simply make the much-needed economic recovery harder and will mean further misery for people who are out of work or who can’t get the hours they need”, she said.
“The OCR is not the right tool for dealing with the current drivers of inflation, which are council rates, household energy prices and global oil prices.
“Squeezing working people will not bring down the price of electricity.
“We need a more sophisticated approach to managing inflation that doesn’t rely on putting people out of work.”
Breman appeared to concede that the unemployment rate was a problem.
“We do care deeply about the labour market,” she said.
“We have shown you differences across different regions of New Zealand to show that we’re looking into the detail.
“The other thing is that the labor market is always a number of factors that are important.”
Breman said the problem was that though employment growth was a bit stronger than expected, there were more people looking for a job.
“This is still a really tough labor market for many households, particularly young households and also the people who are long-term unemployed, but we also see some encouraging signs.
“But it’s not a strong labor market yet.
“We do know that bringing inflation down so that real incomes are growing faster will help demand, particularly for consumption, household consumption.
“And that’s also why I stress that household consumption is important for the services sector.
“And that is where you get a lot of the job growth.”
But the problem for the Government is that there are now only 60 days (and one OCR review) to the election.
The slow recovery the Bank talked about yesterday looks unlikely to see any substantial recovery in unemployment figures until late 2028.
Certainly, there is no forecast for the next three years showing a return to the four per cent figure of the December 2023 quarter, which covered the election that got National elected.
Breman said yesterday that the Bank had not discussed the election and that it focused on its mandate “and the election does not come into that decision.”
Maybe. But the Bank, its mandate and its performance look highly likely to be an election issue.
