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Added: 2026-05-28

[00:00:01]Ok everyone and welcome in to a popup um solo hoon if you like on the Reserve Bank of New Zealand's monetary policy statement and official cash rate decision. Uh absolutely nothing happened but it was still fascinating anyway because the Reserve Bank held the official cash rate as most people expected at 2.25%.

[00:00:26]Now all of the economists expected no change but there were some people in financial markets who thought the Reserve Bank might hike albeit less than 20% was the expectation uh or the the percentage of the expectation of a hike but still most people thought nothing would happen. It turned out that the monetary policy committee, which currently has six members and will soon have seven once they appointed deputy governor, uh had a heated debate about what to do with the official cash rate. Three of the six members voted to hike by 25 basis points to 2.5%.

[00:01:06]And three of the members on the official policy committee voted to hold. So it was a three stalemate and it had to be uh ended broken by the chair Anna Braymond who had voted to hold herself breaking the stalemate and casting the casting vote to hold. So three all with Anna Braman casting to hold. And this is the first time the Reserve Bank has uh essentially um detailed not just the vote itself in terms of the numbers but who voted what. And uh they they picked a doozy to announce it because um a three all with a casting vote is as close as you can possibly get. and the fact that it was as close as you could possibly get was a bit of a surprise for the markets. Uh it's been described as a slightly hawkish result.

[00:02:03]So, let's go now to the overall um uh presentation here, which I'll include in the um uh in the email that goes out with the recording of this uh uh um uh popup followon. So let's uh go now to the key details. So uh the Reserve Bank is held at 2.25% just uh with the three Reserve Bank members. So Anna Brayman, Karen Silk, and Paul Goneway voting hold. And the three outsiders, the independents, Carl Hansen, former chair of the electricity authority, Haley Gurley, who is uh an economist uh who has been attached with Rabber Bank and Prasana Guy who is u an economist uh and an academic. They all voted to hike hardcore.

[00:02:56]Uh uh but it was Anna Braymond who used her casting vote to hold. But the Reserve Bank rattling its sabers and coming across all hairy chested about inflation and saying that uh its forecasts are that it's likely to hike in July and there's likely to be a couple more before the end of the year.

[00:03:17]So most people are saying that there will be three hikes between in July, October and November. So quite possibly three hikes in the official cash rate before the election and a 3% official cash rate. That's the cat amongst the political pigeons. And overall the Reserve Bank today um uh saw the official cash rate going up to a peak of 3.25%.

[00:03:46]by late next year, mid 2028, and essentially it's raised its forecast track by 50 basis points. So that's the sort of hardcore news of today's decision that the Reserve Bank has lifted its forecasts for the official cash rate. But the fact they almost hiked is pretty amazing really and I'll try and explain why. So let's get into um the detail. So there's the monetary policy committee and I thought I'd just detail the names uh left to right given this is the first time we've actually seen this. Um this by the way is not totally uh um radical or new. Um this is what happens in some other central banks. The Bank of England for example name the uh voters. Uh we often get um the uh numbers of voters uh in some other central banks but to actually name them is is quite tough. So, Persona Guy there from left to right. Persona Guy said hike. Karen Silk from the Reserve Bank said hold. Paul Conway from the Reserve Bank said hold. Carl Hansen he voted to hike. Paul um Anna Braymond said hold. Uh Sarah GI voted to hike and a Brmond cast the vote to hold. Here's the forecasts for what the official cash rate is expected to do by the Reserve Bank. And you can see there in the blue what they had expected in February and now what they expect in May uh in their latest monetary policy statement which includes a full fresh set of forecasts.

[00:05:21]And you can see there that uh it's the rate hikes have been pulled forward and lifted up so frontloaded which has been seen by the financial markets as um more hawkish than expected. And so we've seen a rise in wholesale interest rates and the New Zealand dollar this afternoon.

[00:05:39]Uh here's the words of that official cash rate track um according to the committee. So um quote the committee remains focused on ensuring that increased costs do not lead to elevated inflation.

[00:05:51]Uh on balance the OCR will most likely need to increase sooner and by more than envisaged in the February monetary policy statement. So pulling forward uh the OCR hikes and uh they did this at the same time as lowering their GDP forecast by.9 uh percentage points for 2026. This really is quite something. When you essentially forecast more unemployment and slower GDP growth, typically that says the economy has slowed down. And what you normally look to do is you look to cut interest rates. That's the convention um uh that is driven by the Phillips curve uh view of the economy.

[00:06:34]When I say the Phillips curve, this is the Bill Phillips, the New Zealand economist who came up with this idea that there was a trade-off between unemployment and inflation that when unemployment was falling, you're more likely to have inflation rising. And the idea is that um if you want to get inflation down, then you just have to make sure that unemployment goes up.

[00:06:57]It's not very friendly uh when you're one of the unemployed people essentially being told that your job is being used to slow down inflation for everyone else.

[00:07:07]Um it's tough particularly if you're looking to try to get to start a job and I'll talk a bit about this uh more a bit later because this business of people being unemployed more people being unemployed than is necessary you know spare capacity and uh surplus um you know uh production capacity unused production capacity in the economy that you would look to increase interest rates at the same time as you've got more people sitting around doing nothing just just seems wrong. And of course, it's because we've had a supply shock. Now, normally when we have supply shocks like this, central banks like to look through them, as they say. So, they say um if it's a supply driven increase in inflation like the one we've had because of the uh the oil um uh block through the Austral, which by the way staying staying definitely blocked today. uh we see that um central banks go okay uh this is not something caused by demand.

[00:08:07]If we were to restrict demand by putting up interest rates and making more people unemployed that wouldn't actually solve the problem. So we just need to let this pass through and hope that the people who set prices don't try to put too much of this cost increase through into prices and generate second and third rounds of inflation. And that was the view that central banks took in 2021 and 2022 when we had an increase in inflation because of firstly the co supply shock and then of course the Russia invades Ukraine supply shock and they held off and they were described as team transition and uh and then inflation took off and team transition was a bad place to be if you're a central bank. But things were different then because when the supply shock happened in 2021 and 2022, there was very low unemployment.

[00:08:58]Everyone had a job. Everyone was working at full capacity. And when you took some supply out from that, that created some inflation. And unfortunately, it turned into quite a bit more inflation. And everyone got very grumpy with central banks and some some lost their jobs. And um now that the central banks are a bit gunshy about looking through and supply side inflation shocks. Now so far the Reserve Bank has looked through. Some others haven't. The Reserve Bank of Australia has hiked three times. A couple of the central banks in Asia have have um have also hiked in recent months. The US Federal Reserve which had been expected to start cutting at the end of this year is now seeing cut seeing uh increasing their official cash rate or their Fed funds rate the end of this year. The point of saying this is that we're in this weird world where normally when the when we have more slack in the economy, you know, less production uh in in GDP, less, you know, stuff going on. Normally, you have a central bank cut interest rates, but in this case, they held back and in fact they even talked about hiking them. Um and just to give you a sense of you know how much more unemployment the Reserve Bank is expected from expecting from the supply shock they're expecting unemployment rate to stay at around 5.4% right through this year and into 2027.

[00:10:23]So when we look at this we're looking at unemployment staying higher than it should be around five 5 and a half% for four years in a row. That is bad because there's a whole bunch of people who have graduated into the workforce and just because they were unlucky and when they were born, they're going to get stuck and there is scarring. Those people at the end of their lives don't do as well as other people who happen to be lucky enough to be born at the point when the economy is h at the and graduate when when the economy is humming. So um you can sort of understand why um when you've got an economy which is you know overcooked bit like the uh um computer uh uh processor that's running faster than it's uh allowed to and gets too hot. Um we're certainly not in that situation at the moment in our economy. Now you could argue 3.2 two 3.3% is a bit low and that is going to cause a bit of inflation but not 5.4%.

[00:11:27]Uh if you look at how the Reserve Bank um views where the so-called Nairu the nonacelerating inflation rate of unemployment so that level of unemployment where when you go below it you start to generate inflationary pressures and when you go above it you start to cool down inflation the sort of sweet spot if you like. Um, in New Zealand that's generally seen somewhere around 4 4 1/2%. Well, we're looking at the the unemployment rate 5 5 1/2% for 4 years. That's way too long. And you do wonder if if this if the Reserve Bank had a mandate which was also uh uh designed to encourage the Reserve Bank to have maximum sustainable employment whether they would. And this is one of the painful things about the inflation targeting regime that we and just about everyone else runs.

[00:12:20]Central banks use the business of making people unemployed as their tool to slow down the economy and slow down inflation. Now, their argument is, well, inflation is the greater evil.

[00:12:36]Well, it's not if you're 19 cuz you're not going to get a job for 4 years and you're in trouble. Uh, and you know, 4 years is way too long. Uh, we'll talk about this a bit more in a second.

[00:12:52]There's that output gap. So, the difference between February and May is that the Reserve Bank now sees a big droopy slope in the output gap down to nearly two percentage points of GDP.

[00:13:04]What that says is that the economy could be growing 2% fast if everyone was employed, but they're not. And normally what you do when you're a central bank in that situation is you cut interest rates.

[00:13:17]And um the reason our central bank is not is because they're worried about inflation getting a second and third wind from this energy price shock. Well, there's a bunch of ways you can try and avoid that. One way the rest of the world does it is to ensure that you have subsidies from the government to ensure that uh those prices don't flow through into a second and third round effect.

[00:13:41]Certainly a hell of a lot easier and less painful than engineering unemployment to try to scare people into not putting prices up.

[00:13:49]Okay. The other thing that's interesting here is that the central bank has the Reserve Bank has lowered its uh forecasts for house house prices from February. And so they're now seeing a small fall going through the next year and a half or so and then a very slow pickup. Now this is important because if you've got an economy which is a housing market with bits tacked on, you need house price growth to really encourage consumption and activity in the economy.

[00:14:19]And I do wonder if the Reserve Bank is underestimating the balance sheet effect, the balance effectively the balance sheet recession we've we've gone through and that uh changing your forecast to see an even bigger balance sheet recession is likely to put even more downward pressure on the economy.

[00:14:38]Um just to give you a sense though of what the Reserve Bank is fighting against at least in a publicity sense inflation is going to rise over 4% headline inflation over the next year or so uh quite quickly later this year according to the Reserve Bank and they talk there about the indirect and direct price effects of the uh energy price shock from a straight of horses. Um and and there's the new forecast for non-tradables i.e. stuff that uh comes out of New Zealand and is not affected by international prices. And so you can see there that uh non-tradables, the red line, um that's going up as well. And the purple line, which is tradables, that's going up a lot more in part because of energy prices going up and also because the New Zealand dollar has depreciated a bit.

[00:15:30]And here's the real guts of it. Um, you could ask the question, okay, if you know that this is a one-off and that it's going to not turn into second and third round effects, what's one way you can, you know, uh, get some reassurance that, um, you can hold off. Well, one way is to look at inflation expectations. There's a bit of circular element to all of this because uh if you say, well, I'm I don't need to put up interest rates because I've looked at long-term inflation expectations and everyone thinks inflation will stay relatively low in the long run. Therefore, I can afford to ease back a bit. Uh whereas if everyone sees that and goes, "Oh, they're easing back a bit. Maybe I'll change my inflation expectations upwards." You know, there's there's a bit of a dance going on here. Um the Reserve Bank pointed out that longerterm inflation expectations remain stable, but the short-term ones aren't. And you can see that uh last time around 2122, those inflation expectations, at least the 2-year ones, did get above the 3% upper end of the 1 to 3% band. And um that's what made people grumpy and obviously is making them nervous this time around.

[00:16:39]This is my favorite chart from the monetary policy statement, a long-term one looking at New Zealand's oil intensiveness over time. The how many barrels of oil are consumed for every million dollars of GDP?

[00:16:56]Uh how many barrels of oil uh not millions of barrels, how many barrels of oil? It's quite an interesting idea that back in 199899 it took 375 barrels of oil to produce uh a million dollars worth of GDP in US dollar terms in 2015 prices.

[00:17:18]Uh and we've become less oil intensive over the last uh 25 years or so. And you can see that um we're down now to around about 225 barrels of oil per million dollars of GDP. And you may ask, wow, what's that all about? Well, the death of our manufacturing sector has been uh a factor. Just general improvements in efficiency and use of oil. uh our increased in some cases use of renewables has helped and um our um uh increased uh use of other forms of ways to generate GDP. So a bit more services stuff rather than so less stuff more more experiences and also um the the death of our manufacturing sector has played a major role in that. But what it means though is that uh when you have an oil price shock if your economy is not quite so dependent on oil uh then you're less likely to have a such a big shock.

[00:18:29]So that's good news uh from an economic point of view. But it tells a couple of stories really. Uh one we're a bit more efficient. The other um we don't produce as much. And uh a housing market with bits tacked on doesn't need a lot of oil. Just needs a lot of uh cash. Uh well, not the actual cash and paper form, just the the ones and zeros form.

[00:18:52]And uh there we have it. That is uh the um uh that is what we've got there for the uh pop-up hoon uh on the monetary policy statement with a uh not surprise hold but a very surprising thrill draw um with a tiebreak from Anna Braymond. I hope you enjoyed that and found it useful. I'm Bernard Hickeyi for the Kaka. This will go out in recorded form uh soon.