Brad Olsen says Government's 'eye-watering' spending in Budget 2023 will see Reserve Bank raise official cash rate this week

Despite the Government's Budget being called "boring", a leading economist fears it could see the inflationary challenge hitting Kiwis harder for longer. 

Budget 2023 was released last week against a backdrop of the cost of living crisis - inflation is at 6.7 percent and a high official cash rate (OCR).

The OCR has risen from 0.25 percent in August 2021 to the current rate of 5.25 percent as it tries to bring spiralling inflation - sitting at 6.7 percent - under control.

Many thought April's hike could've been the last, but ASB economists are now picking a rise of 50 basis points to the official cash rate this week, and possibly a further 25bp hike in July - peaking at about 6 percent. 

The bank was previously picking a 5.5 percent peak in 2023.

Infometrics Principal Economist Brad Olsen is thinking along the same lines as ASB and expects to see a rise in the OCR. 

"Now with the Budget coming out, it's raised those wholesale interest rates, that is the interest rate the retail banks themselves have to pay," Olsen told AM Early host Nicky Styris. 

"If their funding costs have gone up, if they are all expecting to pay a lot more, then that is going to filter through to people's mortgage rates over time. So we're now in a position where we do think there's probably a bit more work to be done by the Reserve Bank to try and get inflation under control."

Finance Minister Grant Robertson told Newshub Nation on Saturday he didn't "think there was any cause for" additional rate hikes, based on his Budget.

"When you actually look at the extra spending that we're doing, in terms of cost of living type stuff, it's modest," he told Newshub Nation in an interview that aired on Saturday.

But Robertson said it was ultimately the RBNZ's decision whether further OCR hikes were necessary.

"It also has to take into account much more than what the Government's spending is. They have to look at the overall economy, issues to do with the supply chain, immigration, wage pressure… which is much bigger than just the Government's Budget."

Although the Government promised to trim and reprioritise money, Government spending will be $9.4 billion higher over four years than predicted in December and revenue will be $11b lower than forecast.

Olsen believes his latest prediction doesn't come as much of a surprise as the Reserve Bank signalled in February if the Government wanted to spend more money in the Budget, it needed to come from reprioritisation or new taxes because anything else would be generate new cash into the economy that would drive inflation up.  

These "eye-watering" figures that came out in the Budget have Olsen worried that the inflationary challenge facing Kiwis will continue for longer.

"We were put on notice. The Government's now come out with $9.4 billion more spending over the next four years, $10.7 billion less in revenue and a borrowing program that is $20 billion bigger," Olsen told AM Early on Monday. 

"I mean, these are eye-watering numbers and they do worry us that it will keep the inflation challenge going for longer." 

Brad Olsen.
Brad Olsen. Photo credit: AM

This time last week, the markets were "a lot more settled" but after the Budget was revealed on Thursday, New Zealand found itself in a "very different position". 

But it's not all bad news, with inflation starting to ease - coming down to 6.7 percent in March and inflation expectations also easing. 

"If you believe the Reserve Bank is going to do its job, those expectations start to come down and they did for the first time in over a year … so all of that says we have actual inflation coming down and we're getting future intentions about inflation starting to pull back," Olsen said. 

"On the flipside though and here's the challenge, there are a number of indicators that have gone worse." 

Those indicators include the labour market staying "way stronger" than expected and migration surging in New Zealand and on track to reach 100,000 this year.

"You take that all together and we were in a position where we thought, yes, there's a bit more work for the Reserve Bank to do, plus all of that additional lending and spending by the Government and you get a pretty unrestrained economy," Olsen said. 

Watch the full interview with Brad Olsen in the video above.