Holding back OCR wrong response to cyclone - economists

Sharon Zollner and Michael Gordon say holding back the OCR would not help the right people and would build up further problems in the long run.

Friday, February 17th 2023, 11:21AM

The RBNZ is due to make a decision on this matter next Wednesday.

Kiwibank economists say the bank team should not proceed with the widely forecast rise of 50 basis points.

They acknowledge there is still a problem with inflation but say an OCR rise to fight it should be postponed til April.

"A pause from the RBNZ next week would be welcomed by most Kiwis, and highlight that officials are cognisant of the economic damage being inflicted,” they said.

But the acting chief economist for Westpac Michael Gordon said the Reserve Bank was facing a broad inflation problem and pausing this month's rise would not fool anyone.

“Everyone would know that it was simply a delay to doing what is necessary.”

Gordon said the RBNZ held back during the 2021 Covid lockdown and New Zealand was still paying the price for that.

He was referring to housing inflation that soared at that time. He added that helping people recover from Cyclone Gabrielle needed to be clearly thought out.

“A lot of people have been hit hard by the cyclone but the best response for them is more targeted support,” Gordon said.

“People who have lost their livelihood do not benefit from a slightly lowered interest rate. What they benefit from are things like zero interest rates on loans for a set period, which is the kind of thing that banks are already offering on a case by case basis.

“A blanket change in interest rates is extremely poorly targeted.”

The chief economist of ANZ, Sharon Zollner was even more blunt.

“There is going to be no correlation between the people who benefit from this interest rate decision and the people who have suffered from this cyclone. You wouldn't expect them to be the same group of people.” she said.

“You might ease some of the pressure on repayment for a few people in the short term but you would also ease the pressure for a huge number of people who are completely unaffected by the storms.

“And you would risk causing more inflation, and more house price inflation, and more problems that you would have to deal with down the track.

“It is a nasty trade off having to hit growth and employment to get inflation down, and the Reserve Bank would acknowledge that. Why would you want to make that problem worse in the medium term?”

Both economists believe the last thing a person clearing wreckage from a shattered home would be interested in would be a few points change in the OCR.

Tags: OCR