YO U R I N V E S T I N G
Going Down
Going Up, Going Down Economist Cameron Bagrie takes a good, hard look at New Zealand and how we’re going as a nation.
The economy remains vibrant. The unemployment rate has fallen back to pre-Covid levels and is at 4 per cent, a level I consider below maximum sustainable employment.
Oh, the OCR! The Reserve Bank has lifted the Official Cash Rate (OCR) and has warned there’s more to come in 2022. The good times were simply too good, and demand across the country exceeds supply, putting pressure on inflation. The first port of call is returning the OCR to neutral, which is where the Reserve Bank neither has the foot on the accelerator nor the brake. That would be around 2 per cent. That’s 175 basis points above the OCR trough of 0.25 per cent. What does this mean for you? That will likely take a one-year fixed mortgage rate well above 4 per cent. They have already moved in that direction.
Going Up Inflationary pressures are on the up. Inflation undershot expectations for a long time, staying below 2 per cent, but it’s now risen to 4.9 per cent, driven by factors like petrol prices, but also by an underlying persistent element, which is what you get with a hot economy. The Reserve Bank’s mandate is to see the highest sustainable employment, and 2 per cent inflation in the medium term. It’s overachieved (a good thing) but now it risks missing its targets if it doesn’t cool the economy down. It’s moving down from partypopper to party-pooper.
Alphabet soup What will be the shape of the recovery when we eventually emerge from lockdown? In 2020, that pent-up demand and policy stimulus drove a sharp uplift and a V-shaped bounce. That was then, this is now. Eliminating Covid was never going to work. Now the hard yakka starts, working out how to deal with it. Higher vaccine rates are critical, but people will behave differently in an environment where Covid is endemic. The bounce this time around is likely to be far more muted and look like a U. The Reserve Bank says: “There will be longer term implications for economic activity both domestically and internationally from the pandemic…. with pressure on demand and supply.” 112
INFORMED INVESTOR
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SUMMER 2021
