ANALYSIS: Many people in the business sector along with many homeowners have for the past three years blamed the outgoing Reserve Bank Governor Adrian Orr for their cash flow woes. They are both right and wrong.
They are right in that he oversaw the continuation of excessively loose monetary conditions during 2021 into 2022, which over-stimulated our economy and pushed inflation to a peak of 7.3%. He then oversaw the rise in the cash rate to 5.5% come May 2023, which eventually generated enough weakness to push inflation down to 2.2% by crunching the economy.
They are right also in that he oversaw the largest collection of economists in the country who failed to see how weak they were making the economy last year. We now know that weakness amounted to 1.1% shrinkage in the June quarter and 1% in the September quarter.
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But they are wrong in thinking that he bears sole blame for over 7% inflation. The Labour Government’s Finance Minister kept fiscal policy so loose and stimulatory that government debt surged 84% in just six years. Their excessive spending stimulated growth, helped push the unemployment rate to an unsustainably low level, and helped drive high inflation.
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Global supply chain disruptions outside our control also played a strong role in pushing inflation to 7.3%. The monopolistic and oligopolistic nature of many key sectors in New Zealand also bears some blame for the high inflation.
On balance, the failure to recognise the economy’s upturn in 2021 and the failure to recognise its weakness last year will taint Adrian Orr’s legacy as governor. But will his departure mean better times for businesses and homeowners now? No.
Independent economist Tony Alexander: "The failure to recognise the economy’s upturn in 2021 and the failure to recognise its weakness last year will taint Adrian Orr’s legacy as governor." Photo / Fiona Goodall
The Reserve Bank has recently reacted to the new knowledge of extreme weakness last year by speeding up its policy easing. There seems no justification for expecting that the widely predicted low-point for the Official Cash Rate of 3.0% - 3.25% later this year will shift lower – especially because policy is determined these days by a committee and not just one person.
But one suspects the Reserve Bank’s ability to work with a reforming government may be improved, and perhaps the focus will be less antagonistically on wellbeing and other issues and more on the actual economy – hopefully from here on with some more up to date and accurate analysis.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
