Latest / Best of Business / 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 · Best of Business

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