Today’s move by the Reserve Bank to raise the Official Cash Rate by 25 basis points to 0.75% is what most commentators
were picking given the worrying direction that the cost of living has taken, says National Shadow Treasurer Andrew
Bayly.
“Kiwis across New Zealand will have noticed the cost of living rising rapidly this year.
“Prices have been rising at the fastest rate since the David Lange government. They’re also rising faster than wages,
meaning the average wage earner has gone backwards over the last year.
“As expected, today the Reserve Bank has responded by hiking interest rates, meaning many Kiwi families will see more of
their income going to service their mortgage. Many economic commentators are anticipating the Bank to ramp up interest
rates over the next year in the most aggressive monetary tightening cycle in more than 30 years.
“An increase in interest rates will also likely see an appreciation of the Kiwi dollar, which won’t be good for our
exporters.
“The quantum of the Reserve Bank’s large scale Government bond-buying programme (LSAP) – designed to keep interest rates
low when they were unable to lower the OCR into negative territory – is also troubling. The Bank underestimated rising
inflation earlier this year, describing key price shifts as one-off, and persevered with its bond buying. The Bank has
purchased more than $55 billion of Government and local body bonds.
“The scale of quantitative easing, supplemented by its ongoing provision of cheap money to banks through the Funding for
Lending Programme, means that there’s been an avalanche of money in the economy chasing assets.
“The LSAP programme was not without risk to the taxpayer. The Reserve Bank has so far booked $5.7 billion of losses in
respect of its purchases. That’s almost double the $3 billion that Finance Minister Grant Robertson quietly put in
Budget 2021 for this contingency.
“The Minister had the opportunity to better manage the scale and risks of the LSAP programme when the Governor sought an
indemnity from the Government for potential losses. Grant Robertson needs to take some responsibility here and cannot
entirely hide behind central bank independence.
“And now that inflation looks like over-shooting the Reserve Bank’s target, it is faced with having to hike interest
rates as well as the difficult question of how to exit from its Government bond portfolio. Why didn’t they think of that
before they got into it? And why didn’t Grant Robertson insist on a more well-thought-through strategy when he agreed to
indemnify them for it?
“The situation has been further compounded by the Government ramping up spending by 40 per cent since coming into
office. A significant proportion of this has been on low value, low priority programmes with no discernible benefit.
This has further driven inflation up.
“National has repeatedly called on Grant Robertson to pull back on this stimulation in the face of the inflationary
effect it has been having and the clear evidence that stimulation is no longer required.
“He has given no indication that he intends to do so. Indeed, his blunt refusal to disclose what additional spending is
being met from his $41 billion of Imprest Supply is an ominous sign that he intends to keep on spending.
“All this bodes badly for New Zealand and for business especially.”