Latest / The SME Stream / Brad Olsen: Infometrics Principal Economist warns the RBNZ will need to slash the OCR quicker to keep up with inflation

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Brad Olsen: Infometrics Principal Economist warns the RBNZ will need to slash the OCR quicker to keep up with inflation · The SME Stream

• 0:00
  Speaker 1: Inflation is officially back where it belongs. CPI for Q
• 0:03
  Speaker 1: three came in at two point two percent today. That
• 0:06
  Speaker 1: is well within the one to three percent target range.
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  Speaker 1: Now this puts pressure obviously on the Reserve Bank to
• 0:10
  Speaker 1: continue dropping the official cash rates significantly before the end
• 0:13
  Speaker 1: of the year. Brad olsonism for metrics principle economists.
• 0:16
  Speaker 2: Hey, Brad, good evening.
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  Speaker 1: Now we can't say it's totally beaten, because obviously it
• 0:21
  Speaker 1: could rise again. How do you rate the chance that
• 0:23
  Speaker 1: inflation goes back up.
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  Speaker 2: Look at the moment, it's an exciting day to see
• 0:27
  Speaker 2: inflation back in the target band, and I'll take that
• 0:30
  Speaker 2: for the moment. Yes, there are always risks abound, particularly
• 0:33
  Speaker 2: you know, you look at the likes of fuel prices
• 0:35
  Speaker 2: which have come down in the last quarter or so.
• 0:37
  Speaker 2: That's been encouraging, but at the same time always a
• 0:40
  Speaker 2: risk that you know, foreign activities come through and you
• 0:43
  Speaker 2: have conflict that means that fuel prices rise, so that
• 0:46
  Speaker 2: there's a risk. You're totally right, and certainly this inflation
• 0:49
  Speaker 2: figure as well that was published today has been affected
• 0:52
  Speaker 2: by a number of government policy changes, the likes of
• 0:55
  Speaker 2: the Family Boost scheme for early childhood, the return of
• 0:58
  Speaker 2: prescription charges, the end of the year, Aukland regional fuel tech.
• 1:01
  Speaker 2: So there's a lot of moving parts. But long story short,
• 1:04
  Speaker 2: those core measures of inflation are in a better place.
• 1:06
  Speaker 2: We've got headline inflation back in the target band and
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  Speaker 2: actually pretty close to the midpoint. Inflation was better than
• 1:13
  Speaker 2: the Reo Bank is a good result. It does, I think,
• 1:16
  Speaker 2: also reinforce why the Reserve Bank was right to go
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  Speaker 2: with that fifty basis point cut last week, because it
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  Speaker 2: is obviously quite clear that phase and basing there's no
• 1:27
  Speaker 2: need much restriction on the economy.
• 1:29
  Speaker 1: Listen, Brad, your phone is just cracking up. So if
• 1:31
  Speaker 1: you've moved into a spot that's a bit dodgy, moved
• 1:33
  Speaker 1: back to the other spot that you were at at
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  Speaker 1: the start, because that was pretty good. Do you think
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  Speaker 1: now that inflation is sitting at two point two percent,
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  Speaker 1: that the OCR at four point seventy five percent is
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  Speaker 1: too high?
• 1:44
  Speaker 2: Yes, quite clearly, that the official cash rate is too high,
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  Speaker 2: and I think that's why there is a strong possibility
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  Speaker 2: now that the Reserve Bank will have to not only
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  Speaker 2: continue to cut the official cash rate more aggressively than
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  Speaker 2: it might have originally intended to, but it does open
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  Speaker 2: that strong possibility of a seventy five basis point cut
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  Speaker 2: in November when they meet in a couple of weeks
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  Speaker 2: at time, because they'll be looking at taking a three
• 2:07
  Speaker 2: month break a twelve week break over summer. Obviously, inflation
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  Speaker 2: is in a better position, the economy doesn't need to
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  Speaker 2: be restricted as much, and so they might well need
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  Speaker 2: to accelerate how quickly they try and normalize things.
• 2:18
  Speaker 1: So if four point seventy five percent is too high,
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  Speaker 1: where should it be?
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  Speaker 2: You've got to feel like at the moment, probably somewhere
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  Speaker 2: around three and a half is sort of the shoe
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  Speaker 2: plate place to get to.
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  Speaker 1: Then we're talking about one hundred and twenty five basis
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  Speaker 1: point cut and they've only got one more cut left
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  Speaker 1: this year.
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  Speaker 2: Yes, but and this is the challenge, is that around
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  Speaker 2: three and a half is probably where you want to
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  Speaker 2: get to. Now. The risk is if you did something
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  Speaker 2: crazy like one hundred or one hundred and twenty five,
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  Speaker 2: I think that would signal to people that you've sort
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  Speaker 2: of lost all control. And so I think it's something
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  Speaker 2: like seventy five. The Reserve Bank can say, look, we're
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  Speaker 2: not saying we're wrong, but we're saying that we're wrong
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  Speaker 2: enough that we probably need to accelerate things without putting
• 2:53
  Speaker 2: it down and writing anything more sounds like absolute emergency
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  Speaker 2: alarm bells. Gfc's just happen again, and we're not quite
• 2:59
  Speaker 2: an position because otherwise you would start to go, well,
• 3:02
  Speaker 2: the Reserve Bank might be doing the right thing, but
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  Speaker 2: do I trust them that they've actually got any idea
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  Speaker 2: what they're doing If they had to go so big,
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  Speaker 2: fifty is sort of saying that they need to accelerate it.
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  Speaker 2: Seventy five would be a big move, but they could
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  Speaker 2: probably justify it in November, but they couldn't keep doing
• 3:17
  Speaker 2: it time and time again. So there's a little bit
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  Speaker 2: of a balance for them in terms of do they
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  Speaker 2: go big once and try and sort of really try
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  Speaker 2: to get things down, but also they don't want to
• 3:24
  Speaker 2: get their inflation fighting credibility back and then also lose
• 3:28
  Speaker 2: it at the same time by everyone saying we've just
• 3:30
  Speaker 2: always moved too late on this stuff.
• 3:32
  Speaker 1: Brad, Have they realized that they got it wrong?
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  Speaker 2: They'll never say it, but I mean put it this way.
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  Speaker 2: They had twenty five basis point cut in August. They
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  Speaker 2: followed that up with a fifty that wasn't really what
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  Speaker 2: their own forecasts were implying. Of course, go back to
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  Speaker 2: May and they were expecting interest rates might have to
• 3:48
  Speaker 2: remain high or go up. So I think that sort
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  Speaker 2: of pivot that they've had, despite the fact that there
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  Speaker 2: aren't as many pictures of all of this from the
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  Speaker 2: Reserve Bank. Yes, they have got it wrong. They've moved
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  Speaker 2: too slow. They've too slow on raising restrates, they've now
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  Speaker 2: moved too slow to bring them down and that's quite
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  Speaker 2: clearly causing economic pain.
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  Speaker 1: Good stuff, Brad, thank you very much, just as I thought.
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  Speaker 1: That's Brad Olson, a principal economist, to add informetrics