Grant Robertson and Adrian Orr at odds over Reserve Bank's recession engineering

The Finance Minister and Reserve Bank (RBNZ) Governor seem to be at odds over whether New Zealand needs to enter a recession to get spiralling inflation under control.

On Wednesday, RBNZ Governor Adrian Orr hiked the official cash rate (OCR) by 75 basis points - the largest-ever rise - increasing interest rates with the goal of curbing inflation. 

When asked by Green MP Chlöe Swarbrick whether he was "deliberately engineering a recession", Orr said, "I think that is correct". 

"We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth," Orr said. 

But Finance Minister Grant Robertson disagrees with Orr about New Zealand's needs.

"My view is that we don't have to go into a recession," Robertson said, adding "we try to work together. I've got confidence in Adrian."

Placing New Zealand in an international context, Robertson referred to the head of the International Monetary Fund, Kristalina Georgieva, who said last week "countries in 2023 will either feel like they're in a recession or they'll actually be in one".

Ahead of the economic downturn, Robertson believes New Zealand's economic stability through the pandemic leaves the country "in one of the strongest positions in the world". 

"We come in with unemployment at 3.3 percent. That means that we can absorb this economic shock better." 

RBNZ has said unemployment must rise to get inflation under control, with forecasts peaking at 5.7 percent in 2025. 

Robertson told Newshub Nation "my job is to support New Zealanders, to help them stay in work, to be able to get through this period of time".

There have been accusations the RBNZ's monetary policy, combined with the Labour Government's spending, has exacerbated inflation.

On Wednesday, Orr apologised saying, "I do want to put on record that on behalf of the monetary policy committee that are all here, we are sorry that New Zealanders have been buffeted by these significant economic shocks and are experiencing inflation well above our central bank 1-3 percent target range".

Robertson said he doesn't "tend to comment on those specific decisions, but clearly, when the Reserve Bank is making its decisions, it's got a balance to strike as well".

Grant Robertson.
Grant Robertson.

The Finance Minister also "accepts that Government spending needed to increase during COVID, and I think so did my opponents at the time".

"It's now coming down," he said of Government spending. "Now we need our fiscal position to consolidate and that is what we're doing."

He went on to say the Government stood by "the fact that we saved lives and we saved livelihoods when we did initiatives like the wage subsidy scheme".

Robertson would not put forward any areas the Government could reduce spending in, instead saying "we need to keep investing in the services that people rely on". 

"But people will see when we do a Budget policy statement in a week or two that we will have to be very careful in what we invest in from here on out.

"The depth of impact of COVID on the global economy is actually greater than the Global Financial Crisis," Robertson warned.

Increased interest rates will hurt homeowners and while Robertson admits "that will be a significant issue for some households", he said "it's important to point out that when banks lend, they stress test".

"The vast bulk of people will get through this. Yes, it will be tough for them but there won't be catastrophic consequences."

Robertson again referred to New Zealand's strong economic position as a buffer for rising interest rates. 

"One of the good pieces of news is that they will manage their way through that in work and with wages that have risen just a little bit ahead of inflation over the last few years.

"We come into this with households in a better starting point than most others in the world."

Increased interest rates mean record profits for banks will continue to grow but Robertson has ruled out a windfall tax on excess profits.

The Finance Minister is asking banks to "recognise that customers, particularly those who've borrowed in the last couple of years, will be under strain in this next period".

He emphasised banks "have a social license to operate in New Zealand and our strong expectation is they will look after customers through this period. 

"They've signalled to us that's what they're going to do."

Watch the full interview.

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