New Zealand interest rate rises an over-correction?

On my way to work last week there was a very good interview on National Radio (NZ) with Robert MacCulloch an economics professor at the University of Auckland. This ended up to be my lesson plan with my A Level class for the last day of term. MacCulloch argued that the interest rate hike of 50 basis points was too great an increase and could lead to a hard landing and deeper recession that could be avoided. His main arguments were:

• Inflation has stabilised as quarterly inflation had dropped from 2.2% to 1.4% therefore no need for a 50 basis point rise.

• In other countries (USA) inflation is dropping and those central banks are holding off on interest rate increases.

• Stated that the RBNZ wants a hard landing and therefore a recession which can be damaging with higher unemployment.

• More gradualist approach should have been adopted.

• RBNZ stated that the post-covid inflation was a temporary blip and that stagflation was back in the early 1980’s – we live in a different world today.

• Would it be better to go hard early with higher increases and then be able to loosen monetary policy? This may mean recession where you hit mortgage holders and those that become unemployed.

• A lot of other central banks adopting a wait and see approach – couldn’t the RBNZ do the same?

• Okun’s Law – A slowdown in GDP growth typically coincides with rising unemployment. A hard landing will result in this.

• In NZ GDP shrank 2% compared to the UK 11%. NZ grew in 2021 so was there a need to have close to 0% interest rates and print $50bn?

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