‘High bar’ for more rises in bank’s rate

Reserve Bank deputy governor Christian Hawkesby says there is a ‘‘high bar’’ on further official cash rate rises, after the bank forecast the key interest rate had now reached its peak.

Hawkesby also dismissed the suggestion the bank took a relaxed view on new spending in the Budget in order to avoid embarrassing the Government, saying it was operationally independent.

The bank raised the official cash rate (OCR) by 25 basis points to 5.5% on Wednesday but its projections forecast that the next move would be a cut towards the end of next year and that the OCR would then continue to fall until at least June 2026. A further rate rise could have a disproportionate effect on confidence now that borrowers and lenders have been told this should be the peak.

But discussing the bank’s monetary policy statement late last week, Hawkesby made clear he thought that was unlikely.

‘‘We have got to the point for the first time in two or three years that we are able to put out a projection for the official cash rate that is a flatline for the period ahead.

‘‘So that really is a message that we are moving into a zone where if the economy evolves as we expect, we can have some time to ‘watch, worry and wait’ to see how things pan out from here,’’ he said.

‘‘Of course, things [can] change but there is that high, high bar there now that we have built that level of confidence.’’

Some economists had forecast that the $5 billion of new spending in the Budget might tip the Reserve Bank into raising the OCR by 50 basis points, or at least prompt it to forecast that higher interest rates would be required for longer to ensure inflation was under control.

National Party MP and finance spokesperson Nicola Willis pointed out at a select committee meeting on Thursday that the Treasury was forecasting core Crown spending would rise to 33% of gross domestic product (GDP) in the year to June next year, up from 32.5% in the current financial year, before then falling on that measure.

The Reserve Bank also said itself in its monetary policy statement that ‘‘fiscal policy is projected to add to demand over the 2023-24 fiscal year’’ before dampening demand in subsequent years.

But Hawkesby said the bank looked at things in different ways and the key thing for it was a measure of the ‘‘fiscal impulse’’.

‘‘This is a ‘real measure’ rather than a nominal measure and it is sort of scaled by potential GDP instead of actual GDP, and then you have different projections into the future that underpin it . . . so there are technical differences there.’’

Hawkesby indicated the bank’s assessment of the impact of government spending was not a case of it not wanting to embarrass the Government over its Budget.

‘‘We are operationally independent.

‘‘We take the numbers that the Treasury produces around the fiscal outlook at face value; we don’t create our own fiscal projections.

‘‘But our job has been to take those numbers and the way that they are framed for fiscal decisions, and then translate them into a form that makes sense to feed into our process, and I think that is where some of the difference comes down to – just the way that those numbers are presented and used.’’

Hawkesby made clear the bank’s confidence in the data it was using to forecast what could happen to the economy did not entirely extend to the monthly estimates for immigration and emigration produced by Stats NZ, which he described as ‘‘very noisy’’.

ANZ chief economist Sharon Zollner said last week that the Reserve Bank appeared to be adopting ‘‘a pretty mild take on things’’ by playing down the strong net immigration estimates and by merely describing fiscal policy as ‘‘less contractionary’’ than the central bank had assumed in February.

Hawkesby said Stats NZ’s migration data, which last showed a net immigration gain of 65,400 people in the year to the end of March, was highly prone to being revised.

In the past, the bank had sometimes chosen to use its own judgment ‘‘and not taken those numbers at face value’’, he said.

‘‘This time around, we have taken the view that they are the best numbers that are out there and we will just work with those and take the signal that they are providing.’’

But there was also doubt about the exact composition of the migrant flow and therefore its likely impact on inflation, he suggested.

‘‘Are those migrants that are going to add more to demand in the economy by the need for housing, housing services, durable goods and all of those things?

‘‘Or are they migrants that are going to add more to the supply side of the economy and . . . take some of the heat out of those supply constraints we have been facing?

‘‘That is the nature of the uncertainty that we are facing ahead on net migration.’’

Five-minute quiz

1. With the exception of the occasional English or German word, what language did Anne Frank write her famous diary in?

2. Which planet has the slowest rotational period of any planet in our solar system, meaning its days are longer than its years?

3. In Māori mythology, Tangaroa is the god of what?

4. What is the name of the hunter perpetually trying to hunt down Bugs Bunny in Looney Tunes?

5. The Gunpowder Plot, which Guy Fawkes was a part of, was a failed assassination attempt against which monarch? a. William the Conqueror, b. James I, or c. George IV.

6. Excluding territories, which

Australian state has the highest population density?

7. Which of the following sporting events has the furthest world record throw? a. Javelin, b. Discus, or c. Hammer Throw.

8. The alveoli are located in which organ?

9. What is the bonus associated with the square in the centre of a scrabble board?

10. The Sargasso Sea, the world’s only sea without any land boundaries, is located in which ocean?