Reserve Bank Governor Adrian Orr apologises as NZ braces for economic suffering, admits purposely engineering recession

The Reserve Bank Governor has apologised to Kiwis as New Zealand braces for dark economic times and admitted deliberating engineering a recession to slow spending. 

And Adrian Orr's message to think harder about spending - or "cool the jets" - isn't just for the public. He has told the Government to spend sensibly or risk even higher inflation.

It follows the release of the Reserve Bank's Monetary Policy Statement (MPS) on Wednesday, which predicted inflation has not yet peaked, the official cash rate (OCR) will need to continue to rise, and as a result, New Zealand faces a year-and-a-half of either zero or negative growth. 

The Reserve Bank hiked the OCR by 75 basis points on Wednesday - the largest-ever rise - to increase interest rates and hopefully curb inflation.

Orr appeared before Parliament's Finance and Expenditure Select Committee on Thursday to explain that New Zealand has been "buffeted by very significant economic shocks" - namely COVID-19 supply chain disruptions and Russia's invasion of Ukraine - and that global inflation is persisting longer than what was expected when the last MPS was released.

"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."

As the Reserve Bank acknowledged in a review earlier this month, Orr said it could have begun raising the OCR earlier in 2021 to get on top of inflation. But inflation would still be north of 6 percent because of the subsequent conflict in Ukraine, he said.

The latest Consumer Price Index figures released in October had annual inflation at 7.2 percent, while Wednesday's MPS projects it will hit 7.5 percent in the coming quarters and not fall below 3 percent until mid-2024.

While Orr has warned Kiwis to "think harder about your spending" to lower demand, he also said on Thursday the need for sensible spending extends to the Government. 

National's finance spokesperson Nicola Willis asked Orr if the Government proposed more spending than it outlined in its previous plan - which the Reserve Bank used for forecasts - whether that would be a risk to inflation. 

"All other things unchanged, yes," Orr replied. "The more spending there is, then the more aggregate demand there is and hence more inflation pressure with fixed supply."

But he said how that spending is funded and whether it's short-term or long-term spending would affect how much of an impact the spending would have.

Green Party MP Chlöe Swarbrick asked the Governor if commentary suggesting the Reserve Bank is "deliberating engineering a recession" to tame inflation is correct. 

"I think that is correct," he said. "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."

One of the major impacts on inflation, Orr said, is the tight labour market. He said when he spoke to other central bank leaders, one of the main questions is "where have the people gone?".

He was asked by Willis if the current immigration settings are a "handbrake" on supply and if the Government could make changes to "make your job easier". 

"Labour has never been more scarce," Orr said. "Looking back across the modern economic history that's in New Zealand, the employment participation rate is at a record high level.

"Unemployment is at an incredibly low role and we have a list of indicators of stretch in the labour market and they are all at or near record levels."

Orr said there was previously a "reliance on ongoing net immigration" and the absence of that currently is constraining the productive capacity of the economy.

But just opening the floodgates would also bring its own issues, he said. While new migrants would increase supply capacity, they would also have their own demand, including for more housing and infrastructure.

Despite the dark clouds, Orr said New Zealand is in a "relatively strong position" compared to other countries with a "very stable and well-functioning financial system".

That's a similar message to what Finance Minister Grant Robertson was saying on Wednesday. 

"As a trading nation we are not immune to what happens overseas," he said. "Global growth forecasts continue to deteriorate and the IMF is expecting economies either to be in recession or be in conditions that feel as if they are next year."

"We know this is a tough time for Kiwis who are experiencing cost of living pressures and rising interest rates. New Zealand is well placed in a challenging global environment. 

"Unemployment is near record lows, more people than ever are in paid work and wages have been growing faster than inflation. The Government’s books are in a strong financial position, with debt levels among the lowest in the world."

Willis, however, contends that Government spending has had a significant impact on inflation. 

"Half of the mortgages in New Zealand will come up for refixing in the next 12 months. Many already stretched New Zealanders will now have to find hundreds of extra dollars a week to meet their payments.

"Kiwis are getting squeezed in all directions – rent, groceries, and mortgage payments. Under Labour, the only way these costs are going is up."

Following the OCR announcement on Wednesday, National announced it was taking its policy to cut the top tax rate back to the drawing board. It remains committed, however, to indexing tax thresholds to inflation.