Latest / Best of Business / Brad Olsen: Infometrics Principal Economist on the Reserve Bank increasing the OCR by 25 basis points

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Brad Olsen: Infometrics Principal Economist on the Reserve Bank increasing the OCR by 25 basis points · Best of Business

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  Speaker 1: You're listening to a podcast from News Talk zed B.
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  Speaker 2: The Reserve Bank's Monetary Policy Committee is hiked the official
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  Speaker 2: cash rate for the first time in more than three years.
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  Speaker 2: It's raised the OCA twenty five basis points to two
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  Speaker 2: point five percent. So I'll take back that hiked. They
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  Speaker 2: didn't hike it, they raised it. Hiked would suggest that
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  Speaker 2: they'd gone up an unprecedented amount. They've raised it twenty
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  Speaker 2: five basis points to two point five percent. Economists have
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  Speaker 2: been divided on whether the committee would hold the cash
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  Speaker 2: rate or raised it, and we're joined now by Brad Olson,
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  Speaker 2: CEO and principal economist at Inflametrics. Brad, they raised it
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  Speaker 2: two point five y.
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  Speaker 3: Well effectively, they think now is the time to start
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  Speaker 3: to get things moving up. They're worried about the potential
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  Speaker 3: that over the long term they need to get interest
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  Speaker 3: rates back to a bit more of a I guess
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  Speaker 3: comfortable position where they're not adding anything into the economy,
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  Speaker 3: they're not taking anything away. Of course, last time they
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  Speaker 3: met back in May, they said quite clearly there was
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  Speaker 3: a split vote, but there was sort of questions around
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  Speaker 3: where they need to go. Yes, you've now had the
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  Speaker 3: sort of immediate inflationary spike from the Middle East conflict
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  Speaker 3: has gone. The worry though, is that sort of those
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  Speaker 3: more medium term economic shocks might come through the biggest
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  Speaker 3: one though, And I think one of the reasons that
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  Speaker 3: they probably opted to pull the trigger today rather than
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  Speaker 3: anything else is that in recent weeks you have actually
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  Speaker 3: seen longer dated interest rates, so you look at the
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  Speaker 3: likes of, you know, your two to five year mortgage rates,
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  Speaker 3: they've actually pulled back. And the Reserve Bank did say
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  Speaker 3: quite specifically that the increasing the ocr at this meeting
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  Speaker 3: is intended in part to avoid a further easing in
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  Speaker 3: financial conditions. So they don't want everyone sitting there and going, well, actually,
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  Speaker 3: interest rates are now coming down, what do we plan around.
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  Speaker 3: They wanted to push back a little bit against that.
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  Speaker 3: They're saying there is a need to get back to
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  Speaker 3: a more normal level of interest rates eventually. Now is
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  Speaker 3: the right time to do a little bit of that task.
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  Speaker 2: And well, I'm glad I locked in when they he's
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  Speaker 2: back just a little bit now. But Brad, it's kind
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  Speaker 2: of an interesting one, isn't it, Because we know where
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  Speaker 2: that inflation came from, and it was from the situation
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  Speaker 2: in Iran. So that is not really infreation that is
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  Speaker 2: built into our economy. It's an event that we've had
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  Speaker 2: to deal with. So going forward, as you see what
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  Speaker 2: I'm kind of saying here that that's not really a
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  Speaker 2: intrinsic situation within our economy.
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  Speaker 3: Definitely. I mean, the Reserve Beak Themselve has noted that
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  Speaker 3: back in May when they had to put a forecast
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  Speaker 3: together sort of in the midst of everything, they were
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  Speaker 3: expecting that inflation for the quarter just ended, the Duran
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  Speaker 3: quarter might have been something like four point three percent.
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  Speaker 3: And then again, you know, we're in a position today
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  Speaker 3: where there's a ceasefire that's an effect, and you've had
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  Speaker 3: ships that have been moving through the Middle East and
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  Speaker 3: they've been taking oil. So the Reserve Bank now thinks,
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  Speaker 3: given that fuel prices have already started to ease back
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  Speaker 3: and will continue to do so, that that headline inflation
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  Speaker 3: might only peak at three point nine percent and the
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  Speaker 3: quarter just ended, and it could be back to say
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  Speaker 3: three point three percent in the quarter that we're currently in.
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  Speaker 3: So you're right about that expectation that, look, this one
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  Speaker 3: off event has sort of not quite been and gone,
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  Speaker 3: but we have moved forward quite a lot. Here's the
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  Speaker 3: worry though, and I know this might seem a little
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  Speaker 3: bit backwards, but if the economy then starts to get
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  Speaker 3: rocketing a bit more, if that recovery we were seeing
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  Speaker 3: at the start of this year and we were seeing it,
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  Speaker 3: if that sort of comes back with a bit of force,
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  Speaker 3: the Reserve Bank's then got to be worried that. Not
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  Speaker 3: right now, but in a year year and a half's time,
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  Speaker 3: you've already got slightly too hot inflation. Do businesses go well? Actually, geez,
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  Speaker 3: now that I'm sort of caught between a rock and
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  Speaker 3: a hard place. With a better recovery, now I can
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  Speaker 3: try and make some margin up. Now I can pass
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  Speaker 3: through some bigger art cost increases. So I know that
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  Speaker 3: sort of a little bit backwards. But the bank is
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  Speaker 3: effectively trying to look less. It's sort of the next
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  Speaker 3: month or two more at the next sort of year
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  Speaker 3: or two, and go what's the right balance to try
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  Speaker 3: and get back to?
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  Speaker 2: Yeah, with that in mind, is there any indication, any
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  Speaker 2: indication at all of what they're going to do going forward? Now?
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  Speaker 3: Well, they've been again quite cagy, which is probably appropriate,
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  Speaker 3: you know, looking forward, they don't want to give too
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  Speaker 3: much away because as we've seen the last couple of weeks,
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  Speaker 3: things can change quite quickly. What they did highlight was
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  Speaker 3: that the committee agreed that they think, yes, there are
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  Speaker 3: probably further OCR increases coming. The timing though, is uncertain,
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  Speaker 3: so I don't think and they've said that very specifically
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  Speaker 3: literal statement from the Bank in their record of meeting
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  Speaker 3: they're timing those OCR changes is highly uncertain, and that
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  Speaker 3: those decisions are going to depend on how the committee
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  Speaker 3: thinks businesses are considering their price setting behavior. So RKWI
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  Speaker 3: business is starting to talk a lot more about trying
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  Speaker 3: to raise prices and make up for lost time. Are
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  Speaker 3: they worried about the economy and not passing on price
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  Speaker 3: and increases? Are they what are we seeing in terms
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  Speaker 3: of capacity in the economy. Do you see that a
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  Speaker 3: number of sectors, like the primary sector at the moment,
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  Speaker 3: are in a good spot. Does that broaden out to
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  Speaker 3: other industries or do you see that you know a
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  Speaker 3: lot of different pressures continue to hit. So the Bank's
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  Speaker 3: sort of being pretty open that, yep, there probably are
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  Speaker 3: some more to come, but they're very very cautious around
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  Speaker 3: the timing of that, and I think that probably suggests
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  Speaker 3: in our mind there's probably another one at least in
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  Speaker 3: twenty twenty six. Maybe not quite as strong of a
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  Speaker 3: view that there should be two more getting us back
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  Speaker 3: to three percent by the end of the year. But
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  Speaker 3: clearly there's a focus from the Reserve Bank not to
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  Speaker 3: try and hurt the economy, just trying to move us
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  Speaker 3: from easy interest rates where we are at the moment
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  Speaker 3: back towards more neutral interest rates with an OCR around
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  Speaker 3: three percent.
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  Speaker 2: So, finally, Brad, in your opinion, is this the correct
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  Speaker 2: decision that they've made.
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  Speaker 3: I think it broadly is the right decision. I mean,
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  Speaker 3: it's what we were expecting, which is always good when
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  Speaker 3: you sort of get the pick right. But I think
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  Speaker 3: as well, the big I guess benefit here is that
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  Speaker 3: it sends a bit of a signal everyone's clear, a
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  Speaker 3: bit more on the direction, maybe not so much on
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  Speaker 3: the timing, But it probably also doesn't change a lot
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  Speaker 3: for the everyday key we out there. You know, yes,
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  Speaker 3: we're expecting that retail banks will probably adjust their short
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  Speaker 3: term rates. You know, people on a floating mortgage rate,
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  Speaker 3: for example, they'll probably see an announcement in the next
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  Speaker 3: day or two you'd expect from the banks. But given
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  Speaker 3: that there have already been a couple of banks that
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  Speaker 3: have cut their long term rates again those two to
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  Speaker 3: five years in recent weeks, is probably not a huge
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  Speaker 3: huge amount to do for those longer dated interest rates
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  Speaker 3: right here and now. So a little bit of a
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  Speaker 3: sort of catch up almost from the Reserve Bank getting
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  Speaker 3: to everyone else had already moved to. And so hopefully
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  Speaker 3: that gives everyone a bit more breathing room as we
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  Speaker 3: sort of assess what is still a pretty weird and
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  Speaker 3: wonderful economy out there at the minute.
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  Speaker 2: It certainly is thank you so much for your time, Brad,
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  Speaker 2: appreciate it. That's Brad Olsen COEO and principal economists for Infometrics.
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  Speaker 2: So if you didn't hear, the Reserve Banks Monatary Policy
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  Speaker 2: Committee has hiked the official god ess not saying hike,
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  Speaker 2: they haven't hiked it, sorry. The Reserve Banks Monetary Policy
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  Speaker 2: Commission has raised the official cash rate for the first
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  Speaker 2: time in more than three years. It has raised the
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  Speaker 2: OCA twenty five basis points to two point five percent.
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  Speaker 2: And economists were divided and where they were going to
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  Speaker 2: do that.
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