Back in early February, Squirrel predicted that annual CPI inflation would be back at 2% by September this year
It was a bold call at the time—and ours was a lone voice.
The Reserve Bank (RBNZ), and most economists, were all forecasting annual CPI to stick at, or above, 3% i.e. outside the upper limit of the RBNZ’s 1-3% target range.
Regardless, we argued the data was there to suggest the battle against inflation was largely won, and that interest rates should therefore start to tumble in the coming months.
Still, the OCR stayed at 5.50%.
So, in late March, we again called on RBNZ Governor Adrian Orr to start cutting the OCR as soon as possible
We described the RBNZ as being almost single-handedly responsible for the dramatic reduction in New Zealanders’ living standards over the previous 18 months.
We argued that, given it takes 12 to 24 months for changes in monetary policy to flow through to the economy (thanks to the popularity of fixed rate mortgages in NZ), the RBNZ’s ability to do anything more to influence inflation outcomes over the next year was practically non-existent.
Instead, it needed to take a more forward-looking approach—focusing on what would be right for the economy in a year or two.
As such, with inflation tracking downwards , interest rate cuts were needed sooner rather than later to avoid inflicting any more pain than was strictly necessary.
Still, interest rates stayed where they were.
Finally, in May, the RBNZ released an updated inflation forecast, which still had annual inflation for the year to September 2024 at 3%
We responded, pointing out a number of flaws in the RBNZ’s thinking, and arguing that the actual result was likely to be much lower, well within that 1-3% target range.
That should have been the green light the RBNZ needed to start lowering interest rates to get us back to a ‘neutral’ OCR of around 3%—one which neither stimulates nor suppresses the economy.
Again, we warned of the dangers of holding off on rate cuts any longer, commenting , “If you think the economy is weak today, the news isn’t good. There’s a lot more pain ahead.“
That brings us to this week. On Wednesday, the inflation figures for the year to September 2024 were released, coming in at 2.2%—just 0.2% above our forecast back in Febuary
While we didn’t get the number quite right, our prediction of the unnecessary pain that delaying rate cuts would cause has, unfortunately, been bang on.
By failing to take a forward-looking approach, and factoring in the 1-2 year delay it takes for changes to monetary policy to trickle through to borrowers, the RBNZ has inflicted far more damage than needed.
It’s essentially taken a wrecking ball to the New Zealand economy, with the battering lasting at least six months longer than necessary.
The good news is that dramatically lower interest rates over the next year will gradually restart the NZ economy.
Better late than never, I guess.
But New Zealand will have endured a recession worse than after the Global Financial Crisis. It might be called “inflagellation”.