Why the OCR cut is ‘good news and bad news’

It was once the most anticipated sale of the year for middle-income households, now an economist argues Farmers’ Red Dot sale is a red hot example of economic pressure.

“There were racks and racks of clothes,” says economist Filipo Katavake-McGrath, who had just returned from Auckland for a family funeral.

“Now what that says to me, [is that] in the last year, people could not afford to go to Farmers and buy middle of the road, nothing exotic, very sensible clothing, at the standard pricing.

“So you can look at that both ways, you can look at A, there’s a good bargain now, or B, there were a bunch of people last year who could not afford to buy at regular prices.”

This comes as the Reserve Bank reduced the Official Cash Rate to 5.25 per cent yesterday, the first reduction in four years.

Reserve Bank governor Adrian Orr said it's time to start taking the “foot off the brake”.

“We knew we had to take the inflation pressure out. We only have the interest rate instrument, so we have acted accordingly.

“We are now in a confident position that we are back in a low and stable inflation environment, so that is of great relief, but we're cognizant that it means less spending per person, less investment, and employment is down.”

The official cash rate is the interest rate that banks pay to borrow funds from other banks. It influences all other interest rates, including loan insurance rates and rental prices. Orr aims to bring interest rates back to normal over the next 18 months.

“One would hope that we can always come back to that neutral level of interest rate, which means we're around about the natural rate of unemployment or employment in an economy.

“It's the cycles when we're trying to go from high inflation to low that are really painful.”

Labour MP for Māngere Lemauga Lydia Sosene expressed mixed feelings about the change.

“It's both good news and bad news. Good news because there is the reduction in cost of living pressures. The bad news is it creates more uncertainty for families than for businesses, and we've seen since this government has come in, the amount and the high rise of unemployment in our local community, so in a community like Māngere, the impacts are really wide.”

Lemauga said while the OCR cut can be seen as good news for business and mortgage holders, local programme funding and workforce cuts are having an impact on the local community and shopping areas.

“People have less money in their pockets, people want to keep the lights on for their families. People want to work and they want to feed their families, so there’s a number of issues that I’m contending with.

“Already this week I’ve had a number of people come through the electorate office because they are confused as to why they are being penalised.

“Some are quite limited, be it not able-bodied, be it through illness. What does that mean for them? That has caused a number of questions and the fear, particularly around compliance.”

Photo/File

Where losing jobs becomes a tool for economic gain

Katavake-McGrath said unemployment can be a strategy to stop prices going up, calling it the ‘public pain’ period, but warned there is a downside.

“The Monetary Policy Committee talked really heavily about domestic consumption being the big driver of where inflation currently sits and needing to continue to fall, which unfortunately means people need to stop spending money and that usually happens when they're out of work.”

The economic squeeze and widespread cuts to jobs in the public service sector has driven unemployment to 4.6 per cent in the three months to June, but Pacific unemployment rates are at 8.6 per cent, slightly down from a spike to 9.4 per cent in the previous three months.

Orr said unemployment shouldn’t be celebrated as earning a living is a human right, but levels will fluctuate.

“Job demands are changing, locations of jobs are changing, other things happen in people's lives where they can't participate anymore, so there's always a structural level of unemployment.

“But when monetary policy is leaning against excess demand and inflation's rising, it means that demand becomes less, then over time, wage expectations decline, people can't find as many jobs, etcetera.”

The government campaigned on reigning in public spending and New Zealand’s debt levels, which are now in a healthier range, said Katavake-McGrath.

“In the year 2000, the amount of money owed overseas equaled about 80 per cent of GDP, and this had come from more than 100% in the 1980s, and we're now down at the point where that total figure sits somewhere around 40, 50 percent.

“I don't necessarily see this as a massive reason to jump up in the air and celebrate, but there is at least something sensible going on, but at the same time, this comes at the cost of people's ability to feed and clothe themselves.”