ACT Leader David Seymour says the Reserve Bank is to blame for the same inflation it is now trying to tame

The Reserve Bank yesterday warned that some homeowners could find they had negative equity as it begins to raise the Official Cash Rate to combat raging inflation.

It raised the rate from .75 per cent to one per cent yesterday and said it expects it to go to 3.3 per cent by the end of next year.

But the Bank has provoked a political blame-game over who is to blame for the rising interest rates  — Grant Robertson or the Bank’s Governor, Adrian Orr.

In its first Monetary Policy statement for the year, the Bank said that though annual inflation was peaking at present at around 6.6%, it forecast that it would not be back down to its two per cent target till March 2025.

That means two years of rising mortgage interest rates which the Bank says will bring down house prices.

“Our central forecast is for annual house price inflation to slow over the coming year before declining moderately,” it said.

“This results in the level of house prices declining about 9 per cent from the end of 2021 to mid-2024.

“The assumed slowdown in prices also reflects a significant increase in the supply of new homes at a time when there is near zero net migration.”

But the Bank does not see immigration returning to pre-Covid levels, and that will be another factor that places downward pressure on house prices.

Looking out, the Bank does not see post-Covid immigration immediately returning to its pre-Covid levels.


“Net inward migration is expected to increase gradually towards its 20-year average over coming years, depending on decisions related to any changes to immigration policy currently being reviewed,” it said.

The Bank forecasts that 20-year average to be 24,000 a year, well down from the 58,000 permanent migrants recorded in 2019.

That is consistent with a widespread suspicion that the Government’s current review of immigration and the promised tightening up that it is supposed to deliver is as much about reducing pressure on house prices as it meets labour market demands.

Partly as a consequence, the Bank sees continuing upward pressure on wages.

“We assume that the structural level of unemployment remains elevated compared to pre-Covid 19 levels, largely reflecting a mismatch of skills in New Zealand’s labour market,” it said.

“This has lowered the level of maximum sustainable employment, particularly while New Zealand has border restrictions limiting new migrant workers from filling current labour shortages.

“Annual private sector wage inflation is assumed to accelerate further, peaking at 3.7 per cent at the beginning of 2023.

“This reflects increases in the minimum wage, the currently tight labour market, and rising living costs.”

But Reserve Bank Governor Adrian Orr reminded the MPS press conference that the labour market needs to keep growing.

“At the current level of employment, inflation pressures are growing, and that means that that employment can continue to grow, but it may not grow as fast as labour supply is coming on in the future,” he said.

“So it’s not about those currently in work, it’s about can we continue to create jobs fast enough or faster than the supply of labour?

“And can we do that in a way that doesn’t generate generalised inflation.”

The Bank is also proposing to start selling down its $50 billion-plus pile of Large Scale Asset purchases, which were “bought” off banks in 2020 – 2021 to give them liquidity.

This was a key element in its campaign to stimulate the economy through the Covid crisis.

It was the so-called “money printing” programme by the Bank.

ACT Leader David Seymour said yesterday that it was this very programme that had caused the inflation the Bank was now trying to tame.

“Because of its overshoot in printing money over the past two years, the Reserve Bank is now in the impossible position of chasing inflation from behind,” he said.

“It must raise interest rates, and therefore mortgage rates, right as families are facing record prices for everything they buy.”

Seymour said interest rates had been far too low for far too long.

“It’s now clear that the Reserve Bank went even further than anyone expected.

“It overcooked its money printing in the form of the Large Scale Asset Purchases programme, funding for lending, and a low OCR.

“Inflation is now 5.9%, nearly double the maximum targeted rate of 3% in the 1-3% targeted band.”

Seymour  blamed the change in the Bank’s mandate by Finance Minister Grant Robertson in 2018, which required it to ensure its Official Cash Rate decisions supported “maximum levels of sustainable employment.”

“Make no mistake, this is a gigantic failing of the Reserve Bank,” he said.

“Instead of focusing on price stability, they adopted Labour’s ‘dual mandate’ using the excuse they were focused on employment.”

National’s Finance spokesperson, Simon Bridges, took a very different tack to Seymour and blamed Robertson’s fiscal policies for the inflation.

“Through the pandemic, Robertson has spent more than almost any other Finance Minister, as a proportion of GDP. In this overcooked economy, his spending just keeps adding fuel to the inflationary fire,” said Bridges.  

“With an upcoming splurge of $6 billion planned for Budget 2022, the biggest permanent new spending increase New Zealand has seen, he must show some discipline and rein it in.”

But there are questions about the effectiveness of the Reserve Bank’s stimulatory programme.

Last October, Treasury Secretary Caralee McLiesh told POLITIK that the Government’s $12.1 billion of additional fiscal spending which had a greater effect in avoiding a Covid D recession.

“One of the big lessons is really just about how effective fiscal policy can be in a short term response,” she said.

“Very often, economists will say that monetary policy has a key role in short term stabilisation, and fiscal policy should really look through to the longer term and focus on longer-term growth and productivity and that automatic stabilisers help to manage through economic cycles.

“What we’ve seen is that through measures like the wage subsidy and the resurgence support payment, that very swift and targeted support can play a critical role in short term stabilisation in the face of large, large shocks.

“So I think Covid has really reinforced that lesson on the effectiveness of fiscal policy.”

Though National is currently focussing its political debate on interest rates on the role played by fiscal policy, the issues raised by McLiesh and Seymour may target a more profound issue which goes to the heart of the Bank’s mandate.

Bridges will need to say whether a National-led Government will change that mandate back to an “inflation only” remit.