As expected, the Reserve Bank cut the official cash rate this week by another 50 basis points to 4.25%.
It also signalled it would cut the OCR by another 50 points when its monetary policy committee meets again in February. That would bring the OCR down to 3.75% and put further downward pressure on retail rates for mortgage holders and businesses.
For those struggling to pay the mortgage or service a business loan it is good news. So, too, for the Government which was quick to take credit for interest rates falling after inflation was put back in the 1-3% box.
But there is some bad news behind the announcement. From suggesting as recently as May that interest rates might have to go up the Reserve Bank has backpedalled and now cut the OCR by 125 basis points this year, largely because the economy is faring much worse than it forecast earlier in the year.
Its more pessimistic outlook is in line with the Treasury’s warning last week that it would be downgrading its economic outlook when it releases the half-year economic and fiscal update in December.
So, while homeowners and businesses get to benefit from lower interest rates it comes at a cost to some. The economic downturn, which has helped bring inflation and interest rates down, is also leading to more businesses failing and that will likely continue until the economy finally recovers.
Lower interest rates should help boost economic activity, but the bank has downgraded forecasts of growth for next year.
“Economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025 and, for some, financial stress will take time to ease,” the bank said.
The Reserve Bank delivered an early Christmas present by cutting the OCR to 4.25%.
Government takes credit
While Prime Minister Christopher Luxon and Finance Minister Nicola Willis took credit for inflation and interest rates falling, they took no responsibility for economic activity this year being weaker than expected.
Willis blamed insipid growth elsewhere, particularly in China and Europe, and New Zealand’s disappointing productivity rates for the malaise.
But Luxon said having got inflation under control the Government’s focus now was squarely on lifting economic growth.
The Reserve Bank’s last monetary policy statement for the year came the same day as the coalition celebrated one year in power.
There was plenty of self-congratulations among the coalition partners, although Act leader David Seymour claimed most credit, saying his party had had a disproportionate impact on the Government’s agenda.
Luxon pointed out the coalition had delivered on its promises and pointed to the reduction in inflation and interest rates as part of its success story.
But some, including former National Party insider Matthew Hooton, have criticised his leadership and said he is not up to the job.
Prime Minister Christopher Luxon and his Finance Minister Nicola Willis.
Signs of tension
While he has made missteps, mainly through political inexperience, he has still managed to lead a government through its first year, when some critics predicted at the beginning of the year the coalition would not last. At the same time, there are signs of tension and those might get more difficult to manage through next year and into election year.
The Treaty Principles Bill will create more problems, and it will be interesting to see how Act responds when the National Party and New Zealand First finally vote against the legislation when it comes back to Parliament after the select committee process.
The Government faces economic challenges, as well as dealing with the problems afflicting the health system, which many critics say are the result of staff cuts imposed on Health New Zealand.
It will also have to consider how to respond to the first phase of the Royal Commission of Inquiry into the Covid-19 response. In its report back this week it found much of the Government’s response had been effective but that vaccine mandates had undermined public support for the response and that later lockdowns had gone on too long.
But looking to the next pandemic the report said more preparation was needed, particularly to ensure the health system was ready to respond. It questioned whether the country was ready for such an event.
Both the Labour and Green Parties have seized on that to repeat their criticisms of proposed cuts to the public health team within Health New Zealand, saying that will undermine New Zealand’s preparedness, not strengthen it.
The Government, having only got the report, is yet to respond to it. Meanwhile, the second phase of the inquiry started on Friday, with a new group of commissioners looking more closely at the vaccine mandates, the imposition of lockdowns and at the social and economic impacts of the decisions made.
More work needs to be done to prepare the country for the next pandemic.
Labour and tax
This weekend the Labour Party holds its annual conference, with a range of remits on tax policies up for discussion. Whatever remits get passed by the conference will not automatically become Labour policy but will give direction to the party’s policy council and its MPs about the sorts of tax policies party members want implemented. It seems almost inevitable that Labour will again adopt a comprehensive capital gains tax for the next election.
But Labour leader Chris Hipkins says the focus cannot just be on tax and Labour needs to integrate its fiscal and economic policies with its tax policy.
Next week Parliament returns to work after a recess week. But it is not Parliament as we know it. The House will not sit during the week. Instead, select committees will hold lengthy sessions as part of scrutiny week, in which they will have much longer to questions ministers and their agencies.
For example, the Reserve Bank, which already appeared this week before the Finance and Expenditure Select Committee to answer questions on its latest interest rate cut, will be back there next week for a much longer, three-hour session. Other government agencies and their ministers face similar lengthy reviews.
Beehive Banter is hosted by Simon Shepherd, with NBR’s political editor Brent Edwards.
