MNI INTERVIEW: Ex-RBNZ Chair Calls For 75bps Hike, Bond Sales

A former senior Reserve Bank of New Zealand official has called for a rate hike of as much as 75 basis points at the meeting next week and for the bank to begin selling some of the NZD50 billion in bonds purchased as part of the recent pandemic programme of Quantitative Easing.

Arthur Grimes, a former RBNZ Chairman and chief economist, who is now a senior fellow at consultancy Motu Economic and Public Policy Research, told MNI in an interview that he had been urging the RBNZ to tighten policy for around 18 months, and that he considered current policy settings to be “ludicrous.”

LOW UNEMPLOYMENT, HIGH INFLATION

“To think of unemployment at 3.2%, with 6 % inflation, and if they increase rates by 25 basis points then the Official Cash Rate will be at 1%, it just doesn’t make sense,” said Grimes.

The pace of hikes needed in New Zealand is the subject of some discussion as Grant Spencer, a former Deputy Reserve Bank of New Zealand Governor said the pace of tightening may have flexibility, see: MNI INTERVIEW: "Tailwind" Means Fewer RBNZ Hikes - Ex-Official

Grimes, however, is firm that for now that 25 basis points next week is “too little too late.”

“They need to do a real big move now, say 75 basis points now and then another 50 and then another 50,” he said.

HOW BIZARRE

Grimes said that it was a “bizarre” situation for real interest rates to be negative with the economy overheating, even as house prices – up 27.4% last year according to research house CoreLogic – start to cool.

While it was difficult to name an optimal level for interest rates, Grimes said the official interest rate should “have a '3' in front of it” by the end of the year.

He described current RBNZ Governor Adrian Orr as a “populist” whose policy was short term where it needed to be long term for the health of the economy. “The RBNZ has got itself into such a mess that it needs to start demonstrating some credentials for a central bank and get the economy back on an even keel,” said Grimes, see: MNI STATE OF PLAY: RBNZ To Hike In 25bps Increments-Governor.

The RBNZ meets on Wednesday next week and is expected to raise rates by 25 basis points to 1.00% after beginning its tightening cycle last year with a 25 basis point hike.