TLDR: Reserve Bank Governor Adrian Orr threw a big hairy monetary policy cat amongst the political pigeons three months ago by unexpectedly warning of big new rate hikes and telling spenders to ‘cool their jets’. On the day, it appeared a real blow to the Labour Government’s re-election hopes. Business, consumer confidence and Labour’s opinion poll support took an immediate dive in December.
Yesterday, Orr threw a different type of feline into the Government’s thinking which may prove even more politically problematic in the lead-up to Labour’s sixth budget on May 18, which will set the scene for the election on October 14.
The head of the independent central bank warned new PM Chris Hipkins and Finance Minister Grant Robertson that the Monetary Policy Committee would prefer any new spending for repairing and rebuilding the east coast of the Northland after Gabrielle be funded from new taxes or spending cuts elsewhere, rather than create a net fiscal stimulus via new borrowing that might generate more inflation in an economy running at full capacity.
The implication being that big new Gabrielle spending funded from borrowing and not accompanied by offsetting spending cuts or revenue increases might trigger yet more monetary policy tightening, which in turn would blast through to median-voting homeowners with big mortgages.
Orr’s comments came as the Opposition demanded Robertson rule out a new ‘flood tax,’ creating the risk for Labour that any new Gabrielle spending would have to come from spending cuts elsewhere. The Greens called for a windfall tax on fossil fuel companies to pay for the climate change damage. The contest over funding the spending means the bipartisan approach on borrowing lasted barely 24 hours.
Just the previous day, Opposition Leader Christopher Luxon had agreed with the Government that Gabrielle rebuild spending could come from borrowing. Now Luxon has the Reserve Bank Governor on his side, accidentally on purpose demanding austerity under threat of mortgage rate hikes.
Awkward to say the least.
Yesterday’s Monetary Policy Statement and the first Parliamentary Question Time of this election year was jam-packed with news. I include all the details, my analysis and my questions to the Governor in the news conference below the paywall fold and in the podcast above for paying subscribers.
Elsewhere in the news overnight and this morning
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