Reserve Bank in Lala Land

Wed, 23 Feb, 2022

“Inflation is twice the maximum level set down by the Reserve Bank’s remit, and it is now saying that’s ok because inflation will return to 2 per cent ‘over coming years’”, says ACT Leader David Seymour.

“Today’s 0.25% basis point lift in the OCR to 1% is predictable pain for households, and it amounts to a hangover from low rates that subsidised the Government’s COVID borrowing binge.

“New Zealand’s COVID response has been a grand illusion, hiding behind the twin oceans of the Pacific and printed money. Now that ocean of printed money is washing up as inflation at the pump, the checkout, and the cost of housing. The Reserve Bank is essentially saying it will do more of the same as conditions get even worse.

“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. It must raise interest rates, and therefore mortgage rates, right as families are facing record prices for everything they buy. Today, it effectively said it would rather let it get further ahead.

“I asked the Governor in 2020, ‘are you not worried that low interest rates will lead to an asset bubble creating inequality?’ He said it would help people keep jobs. I asked him, ‘so people should be grateful for a job even if they can’t afford a house?’ ‘Yes,’ he said.

“The Bank focused on the wealth effect, hoping that rising house prices would keep the economy busy. Now the economy is busy but stalling as prices rise, and middle New Zealanders are being squeezed by the effects of the Bank’s cynical policies.

“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.

“Interest rates were far too low for too long and we are paying for it in inflation. The inflation at the checkout and the petrol pump is not the worst of it though. The record inflation in house prices over the past two years is worse, because it destroys the social fabric of our country. Rampant house price inflation has left a generation of young New Zealanders further from the Kiwi dream than ever.

“Make no mistake, this is a gigantic failing of the Reserve Bank. Instead of focusing on price stability, they adopted Labour’s ‘dual mandate’ using the excuse they were focused on employment. It overdid it, have just said it’ll keep doing the same thing, even though everyone is feeling the pain of inflation and rising interest rates because they left it too late.

“The Reserve Bank uses monetary policy to maintain price stability as defined in the Remit. The current Remit requires the Bank to keep inflation between 1 and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint and supporting maximum sustainable employment.

“It has clearly overshot, and walking back its loose policy will hurt far more than if it had taken a sensible approach all along. Instead, it is going to keep pumping up inflation, promising it will go away ‘over coming years.’

“Inflation is at a 31-year high and Kiwis are being squeezed from every direction – at the checkout, at the petrol pump, and when they pay the rent. Today’s decision will prolong the pain by keeping doing the same thing slightly slower.

“The only adequate response is a return to rational economics.”

ACT would:

  • Get borrowing and wasteful spending under control
  • Change the Reserve Bank legislation back to focusing on inflation only
  • Provide tax relief, cutting the 30 per cent tax rate to 17.5 per cent, giving the average worker an extra $2,000
  • Stop hitting businesses and productive people with new rules and taxes
  • Immediately allow all vaccinated, negative tested travellers into the country – New Zealanders, workers, students and tourists.

Read our full plan here.