If the RBNZ doesn’t ease the OCR it should at least give a concrete idea, in the May 22 MPS, of when it will start coming down, he says.
“With every economic indicator being weaker than expected things are pretty much playing out as the central bank and economists expected.”
While the banks’ economists are saying no easing of the OCR until November or February or even mid-year next year, Cunningham thinks this is wrong.
Squirrel Mortgages founder John Bolton says this is a classic example of the Reserve Bank looking in the rear vision too much when trying to run the economy.
He says the economy has done enough and the evidence is coming through.
“The RBNZ is still looking in the rear vision mirror going, ‘No, we haven’t done enough and we need to see more evidence’. That is what I call killing the patient before getting to the operating theatre.”
Bolton says wage inflation is the key problem for the RBNZ because it is a cost of business that needs to be passed on to consumers.
While monetary policy is definitely working, independent economist Tony Alexander says, there is just one element needing to fall into place to allow the Reserve Bank to start cutting interest rates.
“Businesses need to cut back on their price rise plans.” Unfortunately, he says, that has yet to happen and that means no cut in the official cash rate until late this year at the earliest.
Bolton says the wage inflation spiral is fundamentally what the central bank is trying to get the country out of.
“The way to stop it is pain – get the unemployment rate up, squeeze things tight so people stop spending. It puts a lot of pressure on businesses, they don’t relent and hold tight. It is not good for business/employee relations.”
Alexander says the weakening labour market is because monetary policy was belatedly and aggressively tightened over 2021-2023 as the RBNZ fought 7.3% inflation created by the excessively loose financial conditions during the pandemic.
“In an historical sense, unemployment at 4.3% is not bad, but the trend is up.”
He says the RBNZ’s management during 2021-2023 in hindsight, can be considered a failure but unfortunately the price of their poor decisions is borne not by anyone at the central bank but by householders with debt and especially those who bought a property late in 2021.”
Crisis for youth
For Bolton, unemployment is interesting. I think we have an emerging crisis, particularly in youth unemployment, Bolton says.
The number of teens not in the labour force lifted by 6.8%. According to Stats NZ, youth not in employment, education or training (NEET) has lifted to the highest in three years at 14.1%.
“One business had an opening for a young person just starting out and they got 1,000 applications.
“We knew the unemployment rate had to go up to deal with inflation and it feels sad to make people unemployed to correct the economy but that is conventional economics.”
He says every day regular Kiwis are basically paying the cost of bureaucratic incompetence.
Kiwibank chief economist Jarrod Kerr told the NZ Herald there is a close correlation between unemployment rates rising and people being forced to default on their property. It’s not going to snowball like we saw in the 1990s, but it will increase.”
He is expecting mortgage defaults to increase alongside the unemployment rates. “We are now at a point where businesses are being forced to lay off staff, which is concerning.”
He says even with the Reserve Bank’s harsh measures, New Zealand is still suffering from a critical imbalance between supply and demand in the housing market which showed no signs of abating and was being exacerbated by continued regulatory hurdles and infrastructure deficiencies.
