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Differences of opinion on interest rates appear between business leaders and economists

By on October 3, 2021 0

Economists are still convinced that the Reserve Bank should raise interest rates – but business leaders are rather chilling at the idea.

That’s a conclusion to be drawn from the latest NZIER Shadow Board publication ahead of Wednesday’s decision on the Reserve Bank’s official cash rate (RBNZ).

The NZIER has an unofficial panel – a “shadow board” made up of economists, academics and business leaders – which offers perspectives on what the RBNZ should do before its decisions.

And while the ‘council’ view ahead of the RBNZ’s latest OCR decision in August was unanimous that interest rates should rise, the Covid Delta outbreak came a day before that decision, forcing the RBNZ to step back and hold OCR unchanged at the emergency setting of 0.25%, it has now been activated since March 2020.

The long lockdown Auckland has endured since then has changed some views.

NZIER said its members of the business ‘shadow council’ highlighted the negative impact of the latest foreclosure on businesses, with small and medium-sized businesses particularly affected.

“This has led some members of the Shadow Board to demand that monetary policy remain unchanged at the next meeting.”

In contrast, other board members continued to view tightening monetary policy as appropriate given the “intense inflationary pressures” in the New Zealand economy.

“These inflationary pressures reflect both strong demand and acute supply pressures. In addition to increasing broader inflationary pressures, some members of the Shadow Board have also pointed to the surge in asset prices resulting from monetary policy. too flexible. “

Among those who did not want a change was Liz Tozer, Customer Service Manager at MYOB.

“New Zealand’s SME sector has been hit hard by the latest Covid-19 Delta lockdown and ongoing restrictions. For many, revenues have fallen sharply, projects or sales have been delayed and work this quarter will have been significantly disrupted, ”she said.

“For now, given the current environment, interest rate hikes by the RBNZ would only put additional pressure on local businesses that are already struggling.”

Kerry Gupwell, Managing Director of Boffa Miskell confirmed.

“The latest lockdown forced the government to provide additional support in terms of wage subsidies and so on.

“While recent labor market figures and the inflation rate were clear signs that we needed a tightening of monetary policy, including an increase in OCR, Delta complicated matters, it didn’t therefore there should be no changes to the current parameters at this time. vaccine rollout now, “he said.

However, Kirk Hope, managing director of Business NZ, thought that despite significant uncertainty over current cases of Covid and a potentially continuing impact on production which makes decision-making risky, the Reserve Bank “has no choice but to move up interest rates now given the continued significant rise in inflation expectations.”

“… The risk of not moving now on interest rate hikes is that the Reserve Bank may have to go a lot stronger next year.”

Stephen Toplis, head of research at BNZ, said “there is no excuse” not to raise interest rates in New Zealand.

“… Least regrets means the cash rate must be considerably higher.” “

Arthur Grimes of Motu and Victoria University said the Reserve Bank “is lagging far behind” on inflation.

“They caused a hugely destructive hike in house prices and now have to start redeeming themselves by raising rates. A downward sale of some of their massive bond holdings is also warranted. This tightening applies even more firmly over the course of the year. of the coming year. “

Viv Hall, also of Victoria University, says inflationary pressures continue to become more persistent and that there remains the risk of even higher asset price inflation, “and the contribution of monetary conditions to supporting maximum sustainable employment has been more than sufficient “.

“Gradual increases in OCR are now needed, starting with an immediate 25 basis point increase.”

Kiwibank chief economist Jarrod Kerr said it “will be another tough decision” for the RBNZ given that Auckland is likely still at lockdown level 3.

“A” considered “increase of 25bp to 0.5% is the most justified. But the explanation must respect the suffering that the largest city is going through. As our strategy evolves from elimination with vaccinations to vaccination and to life with it, the economy has shown enough momentum to justify the withdrawal of emergency stimulus levels. “

And Michael Gordon, acting chief economist at Westpac, said domestic conditions “clearly warrant a move away from ultra-low interest rates.”

“… Covid-related restrictions will remain a risk over the next few months, as our vaccination rate is still a long way from offering effective levels of protection.”