National presses Adrian Orr on Reserve Bank's benign take on government spending

Thursday, 25 May 2023

National Party finance spokesperson Nicola Willis appeared to briefly put Adrian Orr on the back foot.

Reserve Bank governor Adrian Orr attempted to fend off National’s barbs on its relaxed view of government spending on Thursday morning.

National Party finance spokesperson Nicola Willis asked a series of questions that appeared designed to force Orr to admit that the May Budget would prove inflationary, at least in the year ahead, when Orr appeared in front of Parliament’s Finance and Expenditure select committee.

However, Orr did not appear willing to give ground.

The Reserve Bank released what was viewed as a “dovish” monetary policy statement on Wednesday at which it raised the official cash rate by 25 basis points to 5.5%, but signalled it expected that raise to be the last for at least three years.

* Kiwibank and BNZ follow other major banks in lifting home loan rates

Reserve Bank Governor Adrian Orr lifts the official cash rate (OCR) by 25 basis points.

* ASB and Westpac lift home loan rates following Reserve Bank OCR hike

There had been fears that high levels of immigration and an extra $5 billion of government spending in the Budget could mean a higher rate was needed to bring inflation under control.

But the bank indicated it did not expect changes in government spending to have the overall effect of increasing inflation over the next few years and described the impact of strong immigration as “uncertain”.

Willis questioned how the former could be the case given the Treasury was forecasting government spending as a proportion of GDP was expected to rise from 32.5% of GDP to the higher level of 33% of GDP in the next financial year.

Orr appeared to briefly stumble at times as he checked data, but reiterated that the forecasts showed government spending falling in real terms as a proportion of GDP overall during its forecast period, which currently runs to June 2026.

National Party leader Christopher Luxon is blaming the Government for the Reserve Bank's latest increase to the OCR.

There was a lag of “at least 18 months” in interest rate rises having their effect, he also said, appearing to suggest it was the outlook beyond the end of the next financial year that should influence its current settings.

“When we set interest rates today, the impact for inflation won't be seen for at least 18 months to 2½ years.”

While there was “a blip” in government spending due to investments following the cyclones, “broader government expenditure is anticipated to decline in inflation-adjusted terms and as a percentage of GDP”, he said.

The sparring between Orr and Willis threatened to grow more tense after Willis accused the bank of getting previous forecasts of when inflation would fall wildly wrong.

“Just a year ago, you were predicting that inflation would have come down to less than 4% by now, so why do you think you got your prediction so wrong a year ago?” she asked.

Orr responded that the “world keeps moving on”.

Willis also questioned whether the bank had “failed its mandate” by allowing inflation to rise above its 1% to 3% target band for more than two years.

But Orr rejected the suggestion that represented a failure by the bank.

The Reserve Bank is now forecasting inflation to drop below the 3% upper limit of its target band by September next year.

Orr said its confidence inflation was coming under control was partly based on the fact indicators of consumer spending and aggregate demand as a whole were “easing and in some cases falling”.

He noted both inflation and GDP in the first three months of this year had fallen below the levels expected by the Reserve Bank and other forecasters.

In another indication the economy was cooling, firms were more commonly reporting that “consumer demand” – rather than being able to find staff – was now the main constraint on their businesses, he said.