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Reserve Bank Goverrnor Adrian Orr
Reserve Bank Goverrnor Adrian Orr

The BulletinApril 6, 2023

Come hell Orr high interest rates, inflation must come down

Reserve Bank Goverrnor Adrian Orr
Reserve Bank Goverrnor Adrian Orr

Shocking most economists and the markets, the Reserve Bank lifted the OCR to 5.25% yesterday and is now facing calls to cool its own jets or risk engineering a deep recession, writes Anna Rawhiti-Connell in this excerpt from The Bulletin, The Spinoff’s morning news round-up. To receive The Bulletin in full each weekday, sign up here.


OCR near a rate not seen since global financial crisis

Very nearly Happy Easter to all who observe and to those who just enjoy four days off. You may recall Reserve Bank governor Adrian Orr sending us off for our last significant holiday break with a stern “Cool the jets” message. There was no press conference to accompany the Rserve Bank’s (RBNZ) official cash rate (OCR) announcement yesterday but the message was just as clear as we head into Easter as it was at Christmas. Like David Bellamy telling us Old Man’s Beard must go in the 80s, inflation must come down. The RBNZ didn’t quite rocket us back as far as that ad does, but with a 50 basis point hike and the OCR at 5.25%, we are now in December 2008 territory when the Baha Men’s Who Let the Dogs Out was the number one single and we were coming down off the peak OCRs prompted by the global financial crisis.

Recent severe weather events an inflationary risk

The hike took everyone by surprise. Hat tip to David Hargreave at for his shock and Orr pun. I am expecting a cease and desist letter about today’s headline. Hargreaves’ article is a very good and plain language summary of why the Reserve Bank surprised everyone yesterday and the challenges that lie ahead. In a nutshell, the RBNZ wants home loan rates to stay where they are to continue to reduce household spending. The committee said inflation is still too high and persistent and employment is beyond the maximum sustainable level. The primary concern is that due to offshore banking instability (the collapse of Silicon Valley Bank, the first domino to fall), wholesale interest rates have fallen since February and that could prompt retail lending rates to fall further. They also highlighted recent severe weather events as increasing “the risk that inflation expectations persist above our target range.”

The impact on home loan rates and home owners

As Stuff’s Susan Edmunds explains, the impact on home loan rates should be muted with most of this hike already baked in. Corelogic economist Kelvin Davidson also said the flow-through to mortgage rates was likely to be limited. “It still seems likely that mortgage rates are at or close to a peak,” he said. The Herald’s Jenée Tibshraeny and Raphael Franks point out however, that the latest available data shows that in February, 55% of the $310b of fixed mortgage debt taken out by homeowners, investors and businesses was due for refixing within the following year. Crunching the numbers and likely political impact, Stuff’s Luke Malpass notes that for those with a $400k mortgage who have to re-fix from a 2.6% interest rate to 6.4%, it’s a potential fortnightly increase of $600 in repayment costs.

RBNZ ‘done too much’ as economists warn of risk of deep recession

Yesterday’s news has several economists telling the RBNZ to cool its own jets on the OCR. New Zealand Council of Trade Unions economist Craig Renney said the RBNZ should pause before it considers further increases in interest rates noting monetary policy operates with a significant lag. Renney also took issue with the note on maximum sustainable employment. “To say that unemployment is above its maximum sustainable level is to accept that tens of thousands more Kiwis must become unemployed,” he said. A round up of reactions from economists here but research firm Jarden said the bank had taken a “myopic” approach to achieving its inflation target “likely to result in a more pronounced economic downturn in the second half of 2023.” Brad Olsen, Infometrics chief economist, said there were clear risks that the bank would go too far and engineer a deep recession.

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