Reserve Bank Governor Adrian Orr says the central bank is "sorry" that Kiwis are being buffeted by significant shocks and inflation is above target - but he's also conceding that the RBNZ is deliberately engineering a recession.
In opening remarks before Parliament's Finance & Expenditure Committee (FEC) on Thursday, Orr said that "as we’ve said before, inflation is no one’s friend and causes economic costs".
In later comments in response to questions, Orr conceded that the RBNZ was effectively deliberately engineering a recession.
It is forecasting four consecutive quarters of negative GDP growth from the middle of next year. The technical definition of a recession is often described as two consecutive negative-growth quarters.
The RBNZ has an official target of keeping inflation in a 1% to 3% range. As of the September quarter annual inflation was 7.2%.
On Wednesday the RBNZ increased the Official Cash Rate by a record 75 basis points to 4.25% in an attempt to get on top of inflation.
In his opening remarks to the FEC, Orr said he wanted to reaffirm the RBNZ Monetary Policy Committee’s "determination and confidence we will return annual inflation to within our 1% to 3% target range".
Orr referred to the RBNZ's recent five-year review and said that the MPC "would have had to lift the OCR to around 7% in early 2020 to have achieved annual CPI inflation within our 1-3 percent target range now".
"Such a policy shift would have been inconsistent with the Committee’s Remit and led to many other severe and persistent economic challenges."
He said the MPC could have commenced its tightening cycle earlier in 2021 than it did, in order to better contain core (domestic demand-led) inflation pressure.
"However, the subsequent rise in international food and energy prices would still have led to headline CPI inflation exceeding 6% now."
He said these examples "are not excuses" for inflation not being at 2%.
"They highlight the extent of the economic shocks that buffeted the economy, and the importance of being forward-looking when setting policy, with flexibility in achieving our targets. The lags between our monetary policy actions and inflation outcomes remain long and highly variable.
"Other central banks are in the same boat, and we are learning the lessons together. In an absolute sense, actual and expected inflation is too high and needs to be reduced. However New Zealand is in a strong macroeconomic position relative to most OECD nations."
During the appearance, Orr was asked what he made of commentary on Wednesday's OCR announcement to the effect that the RBNZ was deliberately engineering a recession.
“I think that is correct," he 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."
In response to earlier questioning on recession, Orr gave a detailed view on what might be entailed.
“What we are talking about is, aggregate spending needs to slow. If the supply capacity can’t increase and everyone’s employed and so on, spending has to slow. To do that we are raising interest rates and making people have to pay more for their mortgage and reduce their spending.
"What we are looking at is a 1% of GDP slow down over the period of three to four quarters in the second half of next year into 2024. So that’s 1%.
"So, it’s a very shallow and short period of negative GDP growth. And what it would do if successful, if we slow down and inflation comes out, it would mean that per capita consumption is still in real terms at pre-covid 2019 levels.
"It would mean that participation and employment is still very high but it would be a slowing in spending.
"Ways of reducing the need to have negative GDP growth?
"People could just start expecting lower inflation in the future and start working that way. It’s an inflation expectation.
"So the power is in the hands of the people. If you just start behaving 1% different around inflation expectations and wage growth then our job is easier. We don’t have to pay that cost."
Orr said the next one to two quarters ahead "is going to be really important for us".
"We originally had inflation about 7% and then 7.5% and then tailing off into the 6s pretty early on next year.
"We are now seeing it persisting around 7% to 7.5% for three quarters.
"That starts to become a long period of heightened inflation that seeps into inflation expectations and creates that horrible environment that we need to head off.
"So that’s why we’ve stepped up and said we need to do more and sooner, to break that spiral."
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NZ is not really independent in managing its economy and its affairs. RBNZ has to take the cue from American and other Western Central Banks. 'Engineering Recession'..Is that in the MOA between RBNZ & the Government ?
The FM should have a look into the tools RBNZ uses for fighting inflation, instead of letting it run wild, following the other Central Banks.
I think Jacksons Hole was a real wakeup call for Orr, he is in the same position as most other OECD CBs, very late and now having to do much more then would have been necessary if he had started 2021, that long period of time when NZ had no covid and the 2nd AKL lockdown had not begun, rates where 200 points or more too low throughout that period.
We probably could never have avoided the imported inflation from energy costs, but our hosuing market would not have put on that last 25% that has now all but disappeared.
No, we couldn't avoid the external stuff. Yes, it means getting onto the tightening cycle to give the dollar a backstop was even more important. No one is suggesting it would have had no effect and this response is being pitched as a way to avoid talking about the extent of imported inflation.
This is the bit about the imported inflation people seem to want to avoid talking about. Would the dollar have tanked? Maybe. Would the bottom have been higher if we'd gotten onto it sooner? Almost certainly yes.
Yes, totally agree. And then this morning after Orr warned Kiwis to prepare for the full effects of a recession, Robo said his government (and I'm wondering if they can still really claim to be actually 'governing') had always planned for this. Then, when asked exactly what measures his government would be taking to help New Zealanders through a recession, he said he couldn't say because Labour hadn't yet formulated their policies for election year 2023. Does that sound as if they have done a lot of planning?
Does that sound as if they have done a lot of planning?
They had 9 years in opposition and the best they came up with was a crude "we'll build 100k houses" 6 weeks out from the election.
National are now 6 years in and seem to have the same level of planning.
Our opposition take their "Opposition" job too literally. They just oppose instead of coming up with something better.
Trouble is Nocents, when National do come up with an alternative plan of approach to anything then the left-leaning media in this country waste no time in saying that it will never work. Well, anything should be better than the present as absolutely nothing Labour is doing as a government is working. Things in just about every facet of our society are getting totally dysfunctional (crime, health, education, cost of living, etc. etc.). They will be tossed out of office next November but what damage will they do in the meantime?
He was the greatest prime minister New Zealand ever had! He had an IQ over 160 making him a literal genius. According to Aldous Huxley the greatest qualities a human can possess are intelligence and goodwill, and by those metrics Muldoon was a truly great man. He invested heavily in NZ's future with petrochemical and energy production projects that’ve recouped many multiples of their initial investment. Compare that to the current labour crowd who are proudly destroying the petrochemical industry in the name of false ideology. Labour prioritises race gender and sexual identity as job selection qualities which almost guarantees inferior candidate selection. It's staggering how many billions of dollars that the current lot have squandered, and how much wealth they're in the process of destroying.
As much as I think the RBNZ totally cocked up their response to Covid19 by flooding the economy with money when it clearly didnt need it ... he's now cooked Labour's goose ...
Only the diest of diehard supporters will vote for Ardern when the economy tanks next year ...
Yes, but the incoming government will be faced with a real mess, massive investment needed in Police and justice, Health, Education, 5 Waters (needs billions invested just no co governance). All at a time of recession and falling tax revenue. They will cut useless government spending on things like communications (remember the 3 waters campaign.....) but where will they get the professional engineers to run this infrastructure work - they are all consultants now, or offshore for better wages.
I think most NZers who pay tax would rather see smart investment of tax monies not a massive tax cut, won't be affordable anyway.
National have to deleiver results in 2 terms or we will start to look like Italy and have a new governmant.
I believe in vaccines
"Belief" is about having faith in something. Whereas science is about objective evaluation using data and experimentation, not faith. Alarm bells should have started ringing when authorities had to change the definition of what a vaccine was and did in order to call the mRNA jabs "vaccines." More alarm bells should have rung when bureaucrats, politicians and industry related players forced a shut down of all debate around these products.
By now some people are starting to realise that maybe "safe and effective" isn't just one lie, it is two.
The real time meta analysis https://c19early.org/ is fascinating. Specifically the cost-per-life-saved table. It's quite an achievement of the government to completely avoid all inexpensive treatments while exclusively advocating the expensive ones like molnupiravir and paxlovid. The horrifically expensive monoclonal antibodies are also interestingly funded by pharmac -> see here. No Ivermectin though - stay away from that nasty horse paste. lol - no, it's actually pretty depressing.
We'll be fighting in the streets
With our children at our feet
And the morals that they worship will be gone
And the men who spurred us on
Sit in judgement of all wrong
They decide and the shotgun sings the song
I'll tip my hat to the new Constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
A change, it had to come
We knew it all along
We were liberated from the fold, that's all
And the world looks just the same
And history ain't changed
'Cause the banners, they all flown in the last war
I'll tip my hat to the new Constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again, no, no
I'll move myself and my family aside
If we happen to be left half-alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
Do you?
Yeah
There's nothing in the street
Looks any different to me
And the slogans are effaced, by-the-bye
And the parting on the left
Is now parting on the right
And the beards have all grown longer overnight
I'll tip my hat to the new Constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
Don't get fooled again, no, no
Yeah
Meet the new boss
Same as the old boss
That's the text book answer but it's incorrect. Now is the time to be in cash, the last decade with low inflation has been the worst time to be in deposits/bonds. This is mostly because the increase/decrease in house prices is not captured. If you can buy a house for $200k cheaper by waiting a year then that will dominate the increase in food prices.
Not everyone wants to buy a house and for most it is (or should be) a lifestyle asset rather than an investment. But I get your gist, which is, cash even if it has a negative real return, is a better return than more negative real returns in risky assets at this very moment.
Couldn't a computer programme determine the best rates based on the current inflation rates and a series of other key indicators?
We use computers for forecast financial models I dont see how this would be any different.
Maybe then it can be more pro-active than reactive and we wouldn't end up in this mess.
It doesn't need a model. Just measure inflation properly, then add a reasonable price for borrowing from the future - I'd suggest +5% would be good. This could literally be done in real-time if they wanted to (though I'd suggest daily would be perfectly acceptable too).
Of course, that would cook our exporters due to the effect it would have on our dollar and the then relatively high cost of labour - so they'd just have to get more efficient.
Orr referred to the RBNZ's recent five-year review and said that the MPC "would have had to lift the OCR to around 7% in early 2020 to have achieved annual CPI inflation within our 1-3 percent target range now".
"Such a policy shift would have been inconsistent with the Committee’s Remit and led to many other severe and persistent economic challenges."
I am sick and tired of hearing how we are told that it could have been worse but we did the right thing.
Wgtn rates increase looking at 20% but we got it down to 14%, makes 25% over 2 years.
Govt deficit should have been 19B but only 11B, guess it was zero if we remove the RBNZ bond losses. etc etc
I'm still waiting for the explanation as to how pumping billions of dollars into the residential mortgage market and pushing house prices through the roof was necessary to stop people getting sick and dying from Covid?
There needs to be a full audit of what the billions of dollars the Reserve Bank created and the Labour Govt borrowed during Covid, was spent on. Where did it go? Obviously, nowhere near the health system. Or education. Media seem to have made out like bandits though.
Because Banks are essentially greedy as are their manages who received big bonuses as a result of the extra lending and increased profits. Then the many greedy investors who went in and bought as many houses and commercial as they could buy. Some will pay for their greed however as many of them never imagined the higher interest rates we are facing.
I'm still waiting for the explanation as to how pumping billions of dollars into the residential mortgage market and pushing house prices through the roof was necessary to stop people getting sick and dying from Covid?
You won't get one because that wasn't the reason it was done.
The reason the mortgage market et al was propped up was to maintain economic confidence in the face of a 1 in 100 year (aka, the worst in living memory) global pandemic.
Don't forget that the lockdowns - which were effective in controlling COVID spread in NZ - had never really been tried any where in the world before and were the greatest intervention in peacetime economic freedoms ever seen. Everything was very uncertain.
What we know now, is not what we knew then.
Firstly, "lockdown" is a term used in maximum security prisons to deal with rioting inmates or a security crisis. "Lockdowns" are not a health measure. Did lockdowns really work in NZ to prevent the spread of COVID? In a way, but like sticking fingers in a leaking dike works to stop the flood - for a short time until it can't work any more.
Secondly, extensive pandemic planning has been undertaken by western governments since the days of SARS1 and various swine flu and avian flu scares. These pandemic plans all avoided using lockdowns on the basis that they would not be effective in stopping an infectious respiratory disease and that the lockdown would end up causing more deaths than they would save (as we are seeing now with excess deaths all around the world eg 17% excess death rate in Australia above the pre-pandemic average). Governments knew that lockdowns would not be effective but everyone went along with the civil rights undermining authoritarian Beijing example any way.
Thirdly, Orr and co. could see the massive rate of house price appreciation and ballooning rate of mortgage issuance by the end of Q1 2021, and probably well before. There was no question of a lack of "confidence" in the economy or the housing market at that stage. Yet they still kept printing cheap easy money into the system.
The billions of dollars that the Reserve Bank created are still sitting in the Reserve Bank as reserves, they didn't go anywhere and weren't spent on anything.The government doesn't spend borrowed money either. Government spending increases central bank reserves while borrowing reduces these central bank reserves again, this helps the RB to hit its interest rate target and it does not finance government spending.
Standard and Poor's describes the operation of QE here. https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
The fatal error was lowering rates at a time when credit was flooding the landscape. Now its all gone pear shaped because your OCR is out of kilter with what is going on. Even worst is the past artificially low rates have markedly hindered the ability to reset to where you need to be. The finely tuned Wherrari engine has fouled up a few plugs and if its not sorted correctly it will soon blow a headgasket....lol
India and China don't seem to have any problems accessing cheap energy resources. Oh that's right, unlike them, we in the west decided to declare an economic and sanctions war against one of the world's key energy and raw materials providers. Odd that cutting ourselves off from cheap resources has unexpectedly reduced our access to cheap resources. Who would have thought.
oh dear. Redundancies, loss of hours, lack of employee bargaining power and people falling into poverty. Stick that in your misery index. But at least we can finally get migrants into the country. They can the high pay rents and accept poor labour conditions. That should help the misery index. Happy new year everyone.
But everybody is saying there is too much money about and too much demand and that it needs to be reduced. Perhaps we should stop exporting our own food and save it for the domestic market and that would increase the supply and bring down prices, at the moment we are competing with eight billion consumers and whatever they are willing to pay for our products. We have no purely domestic economy anymore with our many free trade deals we are all now connected to an international economy.
"Orr sdmits the bank was deliberately engineering a recession to bring down inflation.
The central bank cartel also engineered the everything that came in the last 12 years!
Now they will facilitate the transfer of most of that wealth creation, from you to the 1%.
After all, the PM's boss (Herr Klaus Schwab) has been dictating this facilitation, on a slow burner, for many years and the next 7 years are the end-game to the completion of Agenda 2030 when he says " you will own nothing and you will be happy!"
The Great Reset must be stopped!
This has already started in the UK with a major high street bank planning on becoming a landlord. The larger landlords get favorable tax treatment over small landlords ref interest deductability. See old link to news article
https://www.theguardian.com/business/2021/aug/19/lloyds-plans-big-move-…
"So the power is in the hands of the people. If you just start behaving 1% different around inflation expectations and wage growth then our job is easier"
Does he really think people won't try and get a pay rise to match/better inflation, just to make his job easier?
How about injecting a little positivity into the thread?
Orr signed off yesterday's press conference by wishing everyone a "sensibly-spending Christmas". Well, why not? All we need to do in order to bring inflation down is stop spending money we don't have on shit we don't need, and start saving some of it instead. Can hardly be a bad thing, can it?
In the words of the stoic philosopher Seneca:
Set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with coarse and rough dress, saying to yourself the while: “Is this the condition that I feared?”
Why not try having a gift-free Christmas this year? At least you'll avoid having to feign delight at unwrapping another set of serving trays from Briscoes.
The dude is playing Jenga and apologizing as the house of cards starts to hurt more and more overtime. Just stop playing the game of insanely cheap money printing to keep the property ponzi afloat and maybe we won't have these horrific hangovers that slow stab more and more at upcoming generations and those who are not financially literate.
Its the commercial banks which create the money for housing and no printing is involved, numbers are just typed into the borrowers account from the banks own computer keyboard as the Bank of England tell us here. https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
By printing i mean, newly entered funds into circulation, regardless of the method. We consistently lower rates to new lows every few years and drop deposit % required to keep property only climbing.
About time we stick to an OCR rate that doesn't overfund property or control the supply hitting the circulation.
Using monetary policy to smooth out economic cycles is a dumb idea and worse than that it doesn't work as we are finding out. We have an alternative to this and that is to use fiscal policy and as MMT suggests with a job guarantee. https://en.wikipedia.org/wiki/Job_guarantee
Unfortunately no one wants to accept or discuss if it is a ponzi.
I just heard Luxon on the radio.He talked about facing our reality and dealing at best we can....all promising to execute better than labour.And then launched into his tasks of repealing the interest deductibility rules and bright line.
And I really do wonder what reality Luxon thinks we are facing.
You are sorry? Oh well that just about solved everything doesnt it?
You played with tax players money by making mistake after mistake after mistake. Every NZ is worse off than before, while you continue to make hundreds of thousands of dollars in salary and incentives, and also get another contract 5 year extension.
You arent sorry at all. You will be forever reveered as the failed bank governor Congrats, youve made the history books. Be proud!
-7
“You arent sorry at all. You will be forever reveered as the failed bank governor Congrats, youve made the history books. Be proud!”
Exactly, plus all the bad energy he is getting from people, can’t be good for health and mental wise. Well guess that’s the price to pay.
You don't need a recession to lower inflation - why not lower prices? Like remove restrictive land zoning that creates monopolies in food, gas, building supplies, shopping centres, housing land, retirement villages, power generation etc etc. So much of NZ's high costs are due to not let the market work. Why restrict car imports? Why have any rules on rental houses? Can't we decide what we want to rent?
We have had decades of low IQ politicians enforcing "quality" on us - but all have had the effect of making stuff so expensive. Cant we return to a good old capitalist system that worked well for years?
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