Jan 23 • 11M

Tuesday’s Dawn Chorus: Tighter? Or looser?

PM Elect Hipkins wants to focus on inflation reduction, but tax cuts might actually boost inflationary pressures; US and Australian central banks set to slow rate hikes, so why isn’t the RBNZ?

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We may see a spending switch from infrastructure spending and public sector capacity to extra cash for voters looks possible.. Photo: Lynn Grieveson / The Kākā

TLDR: PM Elect Chris Hipkins faces a big call in coming weeks about how to help those hurting the most from high inflation.

He could give them tax cuts and credits to help them pay their extra expenses (and win their votes), which could actually boost demand and further hike prices, or he could reduce Government spending or even increase taxes to tighten fiscal policy, which would help the Reserve Bank (Te Putea Matua) take the pressure off inflation by reducing consumer demand.

It’s not clear from his initial comments in a spree of interviews over the last 24 hours whether he understands the inflationary effects of a policy loosening or hopes the performative aspects of ‘helping Kiwis pay their bills’ with tax cuts will overwhelm the inflationary effects of looser policy in the minds of voters. He would not answer my question on Sunday about loosening fiscal policy in a way that would increase the pressure on the Reserve Bank and inflation.

I include more details and analysis on this trade-off and conundrum below the paywall fold and in the podcast above for paying subscribers.

Elsewhere in the news overnight and this morning:

  • Germany will grant Poland permission to send potent German Leopard II tanks to its neighbours Ukraine, which some in Germany fear would provoke Russia into saying NATO was much-more-directly threatening Russia; and,

  • Economists and markets now expect both the US Federal Reserve and the Reserve Bank of Australia to slow or even stop their rate hikes in the next two weeks because of weakening inflation pressures globally, which is in contrast with our much more hawkish Reserve Bank here, which we won’t hear from again until February 22.

Hipkins’ inflationary choice on tax cuts

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