Editorial: Reserve Bank Governor Adrian Orr faces near-impossible rate call


The Reserve Bank faces its biggest interest rate call in years.

All things being equal, it will lift the official cash rate next Wednesday to head off inflation.

Most economists expect the OCR will be hiked from a record low of 0.25 per cent to 0.50 per cent.

Unemployment is clearly well under control and Inflation is now outside the officially mandated target range.

Some economists have even argued the RBNZ should consider a double hike, (50 basis points) to get ahead of rising inflation in what increasingly appears to be an overheating economy.

This would have the added bonus of putting more pressure on the housing market – which is now a factor for the RBNZ to consider.

But of course, all things are not equal. They are far from it.

In some respects, it faces an impossible task. It is certainly a thankless one.

Strong counterarguments can be – and have been – made warning that the threat of the Covid-19 Delta variant remains so serious that emergency monetary settings should stay in place.

It’s clear that an outbreak comparable to the situation in New South Wales would rock the economy back on its heels, rendering rate hikes redundant.

That could see the Bank being forced to beat a retreat and start cutting rates again.

Reserve Bank Governor Adrian Orr famously runs a “path-of-least-regrets strategy”. But which path holds the least regrets has never been less clear.

He should, however, be free to play the ball in front of him.

He should not have concerns of reputational damage clouding his thinking next week.

“A lot could go wrong with the economy,” ANZ chief economist Sharon Zollner wrote this week.

“The fact that the picture might change abruptly is not a good reason to not respond appropriately to the situation that one faces today. The Reserve Bank can always change direction if required.”

BNZ head of Research Stephen Toplis summed it up: “No matter what the RBNZ does it will inevitably be the wrong thing,” he says.

“Not because the RBNZ is incompetent but because getting it right would require an accurate forecast of Covid’s progression, and economic impact, both here and offshore.

“This is simply not feasible.”

Collectively, we need to accept this reality if we want to make good decisions.

It is vital that we allow the Reserve Bank to make the best call based on our current pandemic status, with the freedom to reverse that quickly if that status changes.

We need to be grown-up about the prospect of mistakes being made. They will be. It is in our own interests to be forgiving.

To some extent, the Governor’s dilemma mirrors the challenge facing all our leaders in this pandemic.

We need our policymakers to be flexible and adjust rapidly to cope with sudden changes in circumstances.

Conversely, we should be wary of trusting anybody who claims to have a clear and unmitigated opinion of what needs to be done.

There is no surer sign that they are pushing a political agenda.

The more certain they are, the less likely they are to be flexible and reactive to new information as it emerges.

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