Perspective with Heather du Plessis-Allan: Here's why holding the OCR in place was the right move
Heather du Plessis-Allan DriveShow Notes
It is fair to say the overwhelming reaction to the Reserve Bank's decision to hold the OCR was surprise and, in some cases, shock. Everyone thought the Reserve Bank would raise the OCR. ASB says it was 95 percent priced in. Even economists who believed the OCR should be held, so as not to kill the nascent recovery, were on record saying they thought the Reserve Bank would do it anyway. They expected it to make the wrong call and hike. And yet it didn't. It held the Official Cash Rate. Now let me tell you why that was the right thing to do. Yes, inflation is at 3.7 percent, which is well outside the target band and far too high. And yes, it is probably going to go even higher, potentially reaching 4.4 percent in the next inflation data release. But the economic recovery is still too fragile to handle a hike. I was in the Coromandel during the long weekend and bumped into one of the local business owners on the main street. We got talking about how things were going for his business. He said this past winter had been the quietest his business had ever seen. And that's despite the GDP growth we are experiencing as a country right now. That's because the growth is not being felt everywhere. It is in the provinces that make their money from exporting food but in places like Auckland and the Coromandel, which rely on Aucklanders spending money they don't have, it is still tough going. What's more, the Reserve Bank is not only worried about what's happening domestically, it's also concerned about what could happen globally. It is worried the AI bubble might burst. There could be a war that disrupts supply chains, a spike in fuel prices beyond current levels, or further instability in bond markets. Any one of those things could trigger a sudden downturn. If that happens, we are going to be desperate for every bit of domestic growth we can cling to. So the Reserve Bank is pausing. It has already put a couple of hikes under its belt and is now taking six weeks to see how those increases filter through the economy and whether the economy can withstand another hike. Now, at the risk of sounding like a broken record, can I just say once again how refreshing it is to have a serious, uncomplicated and calm governor in charge? She instils confidence in her decisions, even when those decisions cause surprise or shock. LISTEN ABOVE See omnystudio.com/listener for privacy information.
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