Open letter to Reserve Bank not to raise the OCR

In an open letter to Reserve Bank governor Adrian Orr, Cunningham says: “I believe it is now time for you to watch, worry and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door.

“Governor Orr: Don’t kill the economy, and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster.

“In my opinion, forging ahead with any more OCR hikes at this point would be lunacy. “And I don’t think the RBNZ is run by lunatics.”

“To illustrate the point, in April 2021 the two-year fixed mortgage rate was 2.6%. Today it’s about 6.6%. On a $500,000 home loan, that’s another $384 per week to find, which adds up to about $20,000 per year.

“Without a pay rise of almost $30,000 a year (pre-tax) that money’s only coming from one place: reducing household spending elsewhere.

“Economics 101 says that if demand goes down as a result of us all spending less, the downturn will ripple through the labour market and wage growth, and ultimately dampen inflation.

“The Reserve Bank needs to allow time for these transition mechanisms to do what they will inevitably do,” says Cunningham.

Main point of debate

“There’s no prizes for kicking someone when they’re down. There’s a pretty unanimous sense across the financial markets right now that there will be another hike today.

“The main point of debate seems to be whether you’ll go a little easier on us at 0.25%, or push harder with 0.50% - although, increasingly, markets are pricing the latter as a possibility.

“Ultimately, if that is the path you take, you’ll have the markets’ backing. For the most part anyway. Many are saying that lifting the OCR is exactly what you, and the Reserve Bank, need to do right now. ‘A stitch in time saves nine’ and all that.

But I beg to differ.

No matter how I look at it, my sense is that raising the OCR further is the last thing the Reserve Bank should do right now.

Earlier this month, the Reserve Bank published a survey of Kiwi business leaders and professional forecasters about expectations for inflation will be in the future. The survey shows expectations one year from now have fallen by 0.8% compared to the December 2022 quarter. While average expectations around inflation two years from now fell by 0.5% to 2.79% – it is a figure that’s within your target 1-3% range.

“While some might argue there’s cause for concern because wholesale interest rates have shifted upwards over the past week – in my opinion that shift is inconsistent with underlying economic factors.

“In fact, I’d suggest the rises are being driven by financial markets participants. After all, who benefits most from financial market volatility, if not the financial market traders?

“What would I do? I’d hold the OCR at 5.25%, but make it clear that this rate is unlikely to be lowered during 2023. That will ensure the tightening monetary conditions for households are delivered, and see wholesale interest rates revert to the level they were after the April OCR review.

“Patience is what’s needed here – and I know the Reserve Bank has it in spades.”