Orr Agrees Government Spending Fuels Inflation Raising OCR Recession Risks

Reserve Bank Governor Adrian Orr has admitted that government spending is fueling short-term inflation and that “one of the risks” of an interest rate hike is that it could cause a recession .

But he qualified those comments during a select committee hearing on Thursday by saying the Reserve Bank did not expect a recession and that the government’s longer-term spending plans are expected to reduce demand in the economy. .

The Reserve Bank surprised economists on Wednesday by predicting in a “hawkish” monetary policy statement that the official exchange rate (OCR) could reach around 4% by the middle of next year.

Much more expected, he also raised the OCR by 50 basis points to 2% in a bid to bring down inflation, which stands at 6.9%, its highest level in 31 years. .

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National Party finance spokeswoman Nicola Willis blamed part of the blame for high inflation and rising interest rates on the government, accusing it of putting ‘more fuel on the fire’ thanks to its spending plans.

These include a $350 “cost of living payment” for low- and middle-income earners that was announced in the budget.

On Wednesday, Orr said amid broader inflationary pressures in the economy, the government’s spending plans amounted to a “small beer.”

Responding to National’s concerns at Parliament’s Finance and Expenditure Select Committee on Thursday, Orr made no attempt to hide a connection, saying government spending “puts upward pressure on aggregate demand and therefore on inflation now”.

Reserve Bank Governor Adrian Orr said recession was “a risk,” but not his main prediction.

Robert Kitchin / Stuff

Reserve Bank Governor Adrian Orr said recession was “a risk,” but not his main prediction.

But he maintained the impact was “at the smaller end” and said the pressure should reverse if the government sticks to its budget forecast, which includes returning to an operating surplus in the years to come. from July 2024.

Orr expressed his “discomfort” at being questioned about government spending.

“We don’t get involved in fiscal policy. It’s the government,” he said.

One of the risks of the Reserve Bank threatening to raise interest rates much higher than it had previously proposed is that it could have a bigger impact on economic growth than expected. Reserve Bank.

The bank acknowledged in its monetary policy statement on Wednesday that “heightened global economic uncertainty and rising inflation were weakening global and domestic consumer confidence.”

Orr agreed to the select committee that the risk of an “international” recession had increased, saying “could return home to New Zealand in a number of ways”.

“One of the risks” of the bank’s response to inflation was that it could force a recession, he said.

But he reiterated that it was not his “baseline central prediction”.

A major move in the construction or housing sector was one of the biggest downside risks, he agreed.

“The construction industry has always been the ‘canary of New Zealand’; it’s either the boom or the difficulty,” he said.