24 Nov 2022

OCR hike: Not fair, necessary or likely to stop rising prices, macroeconomics expert says

6:02 pm on 24 November 2022
Reserve Bank governor Adrian Orr.

Reserve Bank Governor Adrian Orr has conceded the bank is deliberately trying to engineer a recession to bring down high inflation. Photo: RNZ / Dom Thomas

The Reserve Bank is wrong to make ordinary households pay the cost of bringing rampant inflation under control, according to one expert in macroeconomics.

University of Auckland Professor Robert MacCulloch said yesterday's massive hike in the Official Cash Rate was not fair - or necessary - and was unlikely to stop rising prices.

"I think the bank and its governor want to be seen as tough on inflation and get media headlines that the bank is very keen to obey its 1-3 percent inflation target.

"So I think it's more for the jobs of the RBNZ staffers than the good of the nation."

By raising the Official Cash Rate (the rate at which it lends money to commercial banks) by 75 basis points to 4.25 percent, the Reserve Bank's stated aim is to discourage consumer spending.

head and shoulder photo

Macroeconomics expert Professor Robert MacCulloch from the University of Auckland Photo: Supplied

Reserve Bank governor Adrian Orr said it was necessary to rein in inflation, now heading north of 7 percent.

Speaking to MPs at the finance and expenditure committee this morning, he conceded the bank was deliberately engineering a recession.

"I think that is correct," Orr said. "We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth."

However, MacCulloch said the Reserve Bank should have raised the official cash rate last year, when inflation pressures started to build, as "a pre-emptive strike".

In his view, the bank would have been better to keep yesterday's rise to between 25 and 50 basis points.

"A lot of the supply chain pressures from coronavirus are gradually easing, inflation could well start coming down on its own.

"It's an unnecessary crushing of householders across the country when they could have easily just waited to see. They should be trying to engineer a much softer landing for the economy."

Moreover, simply jacking up interest rates would not fix the drivers of the high cost of living for New Zealanders, he said.

"Why aren't the supermarkets more competitive? Why isn't the construction industry more competitive? Why aren't the banks more competitive?

"That's the root cause of the high cost of living and one needs to do reforms across all of these industries to reduce costs and make their more prices more competitive.

"If you don't do that, which they largely haven't done, you're making householders bear all the costs. And not only are they being charged a lot when they buy food, or build a house, or do their banking, but now they're also being crushed by high interest rates."

However, no political party was willing to make the "necessary structural changes", he said.

"I don't think they want to take on big vested interests in business. They're not going to break up Fletchers or take on the big banks. I think they're scared."

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