Analysis: Commentary this week about the OCR staying high for longer is on the right track, writes Katie Bradford.
Anyone hoping for any obvious hint of where interest rates might go during a much-hyped speech by the Reserve Bank Governor on Friday morning will be seriously disappointed.
The closest Adrian Orr came to it was confirming the all-powerful Monetary Policy Committee will start meeting on Monday to discuss where to take the OCR next (if anywhere).
Instead the hour-long speech to the Waikato Economics Forum was an economics 101 tutorial on how inflation works and a history lesson on how it has tracked over the past four years.
It came across as defensive from Orr, who was beaming in from home, confessing he was sick and not there in person so as to protect the audience (quick to add it wasn’t Covid, but still something pretty nasty).
With the Reserve Bank under intense scrutiny and much criticism over the OCR track and inflation, it was clear the Governor felt the need to explain how the country is in the position it is in now.
The speech homed in on the Governor’s feeling that inflation needs to be firmly around the 2% mark.
And that the “last few yards” in getting there (from the current 4.7%) could be the hardest.
Temporary fluctuations in fuel and food prices can throw predictions out the window.
And that takes us back to veiled hints about the OCR track. The clue is in the fact the speech focused on inflation and the fact the underlying causes of it have been hard to tame.
And that means commentary this week about the OCR staying high for longer are on the right track. Until the central bank is certain inflation is under control and in the ideal 2% range, they won’t want to move.
Orr received a double-barrelled question which meant only the second part was answered. The Governor had commented on the very long lag there has been in inflation coming under control in some areas, which led to the question about whether that meant the current 5.5% OCR is too harsh and has gone too far.
Unfortunately, the first part wasn’t answered, and he said the focus was on the risk to households, lenders and businesses of people being in over their heads.
And of course, the bank would say it makes decisions based on what is happening at the time, as we saw with the dramatic falls in the OCR and loosening of other monetary policy during the pandemic.
Orr noted close to 80% of mortgage holders will now be at the average interest rate of 6.4%, and those who aren't yet will be there soon.
That means people are already dealing with those higher rates and starting to adjust to it. The biggest risk to losing your house, he noted, was some kind of household shock – namely losing your job.
Unemployment is slowly starting to overtake inflation as the big risk to the economy.
Adding to the defensive nature of the speech, there was interesting, pointed commentary at the end about fiscal and monetary policy – ie the Reserve Bank and the Government - needing to work together in a far more cohesive fashion.
But noting that few countries have been able to make that successfully happen, it seems an aspirational target.
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