The Reserve Bank’s increase to the official cash rate (OCR) is being labelled a “kick in the guts” by the National Party, while the Greens are calling on the Government to introduce a wealth tax rather than letting interest rates continue climbing.
There were concerns the RBNZ may have to hike the OCR higher than initially expected after extra spending in the Budget produced by the Government last week. Much of that spending has gone towards the cyclone recovery work.
As a result, economists warned the OCR could be on the path to 6 percent, with the potential for a 50 basis point jump on Wednesday.
That hasn’t come to fruition, however, with the RBNZ’s Monetary Policy Committee (MPC) instead approving a 25 basis point lift to 5.5 percent and not shifting its forward path. The OCR is still expected to peak at 5.5 percent.
“Members discussed the impact of Budget 2023,” the RBNZ said. “Fiscal policy is projected to add to demand over the 2023/24 fiscal year, then dampen demand in subsequent years. Overall, fiscal policy will be contractionary on demand over the projection horizon.”
However, it said fiscal policy – the Government’s side of the equation – would be “less contractionary” than what was expected by the MPC in February.
The MPC said interest rates are constraining spending and therefore inflation, but the OCR would need to remain at a “restrictive level for the foreseeable future” to ensure inflation returns to the 1 to 3 percent band. It was at 6.7 percent in the last reported quarter.
Reserve Bank governor Adrian Orr told reporters he didn’t foresee any impact of the OCR decision on mortgage and term deposit rates given it remains on the same track as previously foreshadowed. However, ASB quickly made interest rate increases after the OCR decision.
Reacting to the OCR decision, National leader Christopher Luxon called it a “kick in the guts” and said the Government’s “economic mismanagement” had embedded domestic inflation.
“It’s really sad. I feel sorry for Kiwis that are having to go back and now magic up hundreds of dollars of more money when they don’t have it to pay their interest bill on their mortgages.”
His finance spokesperson Nicola Willis released a statement saying the Government could have been more disciplined with its own spending.
“It was obvious there would be costs from the rebuild of the East Coast and Hawke’s Bay. Those should have increased the pressure to find savings, particularly in the back-office bureaucracy in Wellington,” she said.
Finance Minister Grant Robertson did find $4 billion in savings to reallocate over four years, but that was dismissed as small by the Opposition.
The ACT Party’s leader David Seymour said any benefits Kiwis received from last week’s Budget – which included the removal of the $5 prescription co-payment and allowing more families to access subsidised early childhood education – would be “eaten up” by inflation and interest rate increases.
“If you didn’t get the goodies, it’s higher prices and higher government debt for you,” Seymour said.
“Today’s 0.25 percent increase in the Official Cash Rate is going to hit Kiwis hard, and Grant Robertson is to blame. His inability or unwillingness to find savings to offset his increases in spending is going to hurt the average Kiwi far more than they will benefit from his budget largesse.”
The Green Party’s revenue spokesperson Chlöe Swarbrick said the Government should take responsibility for reducing inflation by introducing a wealth tax rather than letting the RBNZ continue with OCR hikes.
“These decisions are not happening in a vacuum, but in response to Government policy that is not taking deflationary taxation measures,” she said.
“This leaves the same New Zealanders who shouldered the cost of getting through the pandemic to disproportionately carry the bill of recovery.”
She noted that a Newshub-Reid Research poll released last week showed more than half of New Zealanders supported a wealth tax.
“They know the system is not fair and the Greens are here to keep up the fight for them in the halls of power.”
The Government ruled out introducing a wealth tax in the Budget, but has kept the door open to it and other tax changes for its election policy.
Speaking earlier prior to the OCR decision, Prime Minister Chris Hipkins said the Budget was put together carefully to reprioritise funds towards the cost of the cyclone recovery.
“The cyclone, the floods in Auckland, we said that we were going to see these communities through that. There’s an inflationary effect of that. The alternative is to say, well, we’re not going to do something about all of the work that needs to be done because we’re worried about the effect that’s gonna have on inflation. That’s not something the Government was willing to consider.”
Hipkins acknowledged it is a difficult time for homeowners.