The obsession of the Reserve Bank

Matt Burgess writes:

The Reserve Bank has no statutory mandate for climate change. Yet, since Orr’s arrival in 2018, the Reserve Bank has become virtually fixated on the issue. Its most recent annual report has three times more references to climate change than inflation.

And inflation is now at double the maximum level the Reserve Bank agreed to keep it to.

The Reserve Bank’s response to Covid has been nothing short of a catastrophe.

Once the scale of the threat from Covid became clear in March 2020, the Reserve Bank responded with “quantitative easing”. It printed money.

Between March 2020 and July 2021, the bank used its Large-Scale Asset Purchase programme to buy $54 billion of government bonds. It poured tens of billions of dollars into the economy.

The bank ran the programme for too long. When it finally switched off the printing presses, unemployment had been depressed to record lows, wages and consumer prices soared, and inflation expectations increased. Already-high property prices soared by more than 30 per cent in a single year.

The Reserve Bank overcooked the economy, and now inflation is nearly triple the target inflation rate of 2 per cent.

Do not believe those who say the high inflation is mainly due to international factors.

Today, the Official Cash Rate is 5 per cent below inflation, an unprecedented position since at least 1985 and probably in this country’s history.

The OCR and interest rates may have to raise to brutal levels.

High land and house prices will multiply the pain of rising interest rates. Average house prices across the country recently passed $1 million, an incredible figure. The average Auckland home now costs $1.7m. For anyone with a $1m mortgage, each 1 per cent rise in interest rates will cost $200 per week. Higher interest rates will send some households and businesses to the wall.

So if interest rates go up 3%, then they’ll be paying a massive $600 a week more.