Mike’s Minute: The reason the ORC won't rise is simple – we are in a recession

Author
Mike Hosking,
Publish Date
Wed, 14 Apr 2021, 9:45AM

Mike’s Minute: The reason the ORC won't rise is simple – we are in a recession

Author
Mike Hosking,
Publish Date
Wed, 14 Apr 2021, 9:45AM

So it's Monetary Policy day today.

Adrian Orr will roll out a few thoughts on the size of the mess we are in and whether his ink and printing machine are doing the job he thinks they should be. There is a level of commentary about the place, given his promise not to bump the cash rate beyond its 0.25 for a year has expired.

I think most agree the chances of him dropping it are slim to none, although last time he was still not ruling that out. While he might not rule it out, given the mess we are in - and make no mistake, it is a mess of real proportions - sadly too many have fallen for the Government line that things are better than we thought. Hence you see various bits and pieces about the place talking of an interest rate increase. How this can even be suggested, far less put down on paper with a name next to it, is beyond me.

The suggestion is often linked to housing, but Adrian's job is way more complex than that - especially now that the Finance Minister has lobbed a whole lot of directives at the Reserve Bank. Orr now has inflation, employment and housing to deal with, and he has those because the Government is bereft of sensible ideas to be found inside their ideological thought-space so have looked to shovel the problem the Reserve Bank's way.

The reason the cash rate won't rise is simple - we are in a recession. A double-dip recession. The second recession will not be officially confirmed until next month when the GDP figures for the first quarter of this year come out, but the last quarter of last year was -1% and the first quarter (with its lockdowns) won't be any better - a recession. What you want in a recession is spending. Investment and confidence, you partially get that with cheap money. We have cheap money and we are still in recession... so maybe you want cheaper money.

But what we also have - and this is why this is such a mess - is inflation. Costs are rising, but not because of growth. It's because of government policy - stuck ships a mess with containers - all of which lead to increases in prices.

Traditionally, when the bank sees inflation it raises interest rates. They can't do that this time.. this is called stagflation.  It's exactly the opposite of what you want to be happening to your economy. It's what happens when a Government who doesn’t know what it's doing gets let loose, and doesn’t adjust their settings to suit the conditions they can't control. Minimum wage, more public holidays, increases in welfare, leave entitlements... all stuff for the good days, not the days of recession - and certainly always paid for out of growth,  not debt.

So Adrian is between a rock and a hard place and this country is in real trouble. So interest rates going up? Don't make me laugh.