RBNZ chief urged not to harm the economy
“It’s now time for you to watch, worry, and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door,” a mortgage broking boss told the Reserve Bank of New Zealand.
Amidst wide expectations of another OCR hike this week, Squirrel CEO David Cunningham (pictured above) told RBA Governor Adrian Orr in an open letter that “raising the OCR further is the last thing the Reserve Bank should do right now.”
Here’s why.
Migration helps the Reserve Bank’s fight against inflation
The migration boom is set to hit 100,000 net arrivals in 2023, before levelling out to around 50,000 per year post-surge. And while most economists believe this will fuel inflation, Cunningham said migration is “actually the best possible inflation-fighting tool.”
“In your November 2022 OCR announcement, Governor Orr, you said the RBNZ needed to engineer a recession, pushing unemployment up above 5% (from ~3.5%) to bring inflation under control,” he said. “Lower demand for workers reduces the risk of a wage-price spiral and dampens demand in the economy. And, to me, that’s where migration comes in. Bringing the tens of thousands of workers to fill vacancies businesses so desperately need filled and helping to take the heat out of wage pressure.”
In response to arguments that immigrants will push prices up by adding to demand, Cunningham asked, “But what are migrants actually spending on?”
“Rent? Yep – but rents will just continue to rise gradually, as they have for years anyway. And in my opinion, there’ll be no surge there, with new builds continuing to increase supply,” he said.
“Food? Yes – but will food prices actually rise because of a 1-2% lift in population? I doubt it.
“Household furnishings? Sure – but this sector is pretty weak right now, and I can’t see too many supply constraints there that might cause meaningful inflation.
“Entertainment? Absolutely – but in a weak economy, added demand from migration will arguably be a welcome boost. And those ‘working holiday’ tourists are rapidly filling the hospitality sector labour shortage.”
The Squirrel boss also pointed out that retail spending volume has been falling for two years and continues to trend downwards, and the increased demand from migrants will bring about a badly needed positive impact.
Monetary conditions will likely tighten by 1.5% over the next year, based on the current 5.25% OCR
Kiwis are currently paying an average mortgage rate of 4.4% – up from just 3.2% just over a year ago. Now, even if the OCR is held at current levels, that rate is going to increase to 5.9% over the next year, as more mortgage holders’ lower fixed rates roll off to more expensive ones.
“That’s another 1.5% to find on top of where we are now, and with repayment buffers much narrower,” Cunningham said. “In short, monetary policy is on a steep tightening cycle for another year. Kiwis don’t need the screws tightened further via more interest rates hikes. They need someone to cut them a break.”
The “no-frills” budget isn’t expansionary – and that’s actually good news for inflation
The Treasury forecasted in last week’s budget that inflation has already begun easing and will fall to 4.5% by the end of this year, then return to RBNZ’s target band of 1-3% inflation by late 2024.
“Some would point at policies like free public transport for under-13s, free prescriptions, 3,000 more public homes (in a market where residential construction is shrinking) as fuelling inflationary pressures. But, to me, they seem smart policies for the economic environment, that will create downward impacts on inflation,” Cunningham said.
He added that with fuel tax, road user charge, and public transport subsidies all due to end on June 30, “that means September 2023’s quarterly inflation statistic will be a big number – but the Reserve Bank will no doubt look through that and focus on underlying inflation.”
“In fact, I’ve seen a forecast that inflation will sit at 1.9% that quarter, so when you back out these subsidy removals, underlying inflation is much lower,” Cunningham said.
Actual inflation is falling – and so are expectations around where it’s headed
Just over a month ago, prior to the latest quarterly inflation figures being released, RBNZ predicted inflation to hit 7.3% for the year to March 2023 – but the actual figure came in at 6.7% - well below almost every forecast.
Cunningham also noted a survey on May 12 around Kiwi business leaders’ and professional forecasters’ expectations around where inflation will be in the future, with the headline “Short and medium-term inflation expectations fall.”
Average expectations around the inflation rate “one year from now” have fallen by 0.8% compared to the December 2022 quarter. While average expectations around inflation “two years from now” fell by 0.5% to 2.79% – a figure that’s within your target 1% - 3% range.
Summing it up
“While some might argue there’s cause for concern in the fact that wholesale interest rates have shifted upwards over the last week – perhaps suggesting that inflation isn’t quite under control yet – in my opinion that shift is inconsistent with underlying economic factors,” Cunningham said.
“In fact, I’d suggest the rises are being driven by financial markets participants. After all, who benefits most from financial market volatility, if not the financial market traders?
He said the RBNZ should hold the OCR at 5.25% but make it clear that this rate is unlikely to be lowered during 2023.
“That will ensure the tightening monetary conditions for households are delivered and see wholesale interest rates revert to the level they were after the April OCR review,” Cunningham said.
He also urged Orr: “Don’t kill the economy and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster.”
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