RBNZ defends rate hikes

A RBNZ spokesperson told Rural News that the bank understands that higher interest rates add another cost to farmers repaying debt. This is also likely to lead to a higher exchange rate than otherwise, which will reduce exporters’ returns.

“However, higher interest rates now will lead to lower general inflation in the future,” he says.

The bank notes that high and variable inflation makes it harder for businesses and households to plan and to know where best to direct any investment.

“Unexpected changes in inflation also arbitrarily affect relative outcomes for savers and borrowers throughout New Zealand.

“The higher cost of living is particularly challenging for people earning low or fixed incomes, as it erodes purchasing power and is essentially a pay cut and a tax on savings.

“Given the economic costs of inflation, the best contribution monetary policy can make to the New Zealand economy is to ensure inflation returns to being low and stable.

“In addition, holding interest rates lower today may mean that interest rates need to be increased even further in the future to control inflation.”

Speaking at the NZ Economics Forum at University of Waikato this month, Reserve Bank Governor Adrian Orr noted that its monetary policy tools are limited. He says there are long and uncertain lags between what they do with interest rates and the inflation outcomes.

Meanwhile, economic shocks are just that, Orr added.

“For example, in my short time as Governor of the Reserve Bank we have endured Covid-19, the impact of Russia’s invasion of Ukraine, and now the severe weather events impacting many parts of the North Island.

“These events have led to historically significant fluctuations in output, employment, and inflation. RBNZ does not determine the economic context we operate in.

“Instead, we react to the economic context with a clear purpose – aiming for price stability – thus building on a reputation for delivering low and stable inflation expectations.”

Orr says RBNZ is tacking into the inflation headwinds right now by raising interest rates at times of severe capacity constraints in the economy and high inflation.

Recently, the Official Cash Rate was raised from 4.25% to 4.75%. Orr says the OCR still needs to increase.

“While there are early signs of price pressures easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated. Low and stable inflation is a necessary outcome for economic wellbeing in the longer term. Inflation is no one’s friend. Inflation makes people poorer.”