Reserve Bank faces a 'real balancing act' with predicted OCR rise

July 11, 2021

Independent economist Cameron Bagrie says NZ’s economic outlook could change very quickly.

With the Reserve Bank set to publish its monetary policy this coming week, several bank economists are anticipating an increase in the Official Cash Rate by the beginning of 2022. 

Independent economist Cameron Bagrie warned of the instability in New Zealand's economy, given the global issues brought on by Covid-19.

He told Q+A's Jack Tame its facing a "real balancing act" in regard to where they head next. 

"They're playing with the orthodox playbook, but we're sitting in a very unorthodox world, the Reserve Bank has undershot their inflation target for a very long time. 

"Certainly in this term, they need to signal an exit strategy." 

The Reserve Bank will need to "proceed cautiously" should it choose to increase the OCR, says Bagrie.

"I think it's basically ticking the box in saying 'we need to move' and the signals are sooner rather than later. 

"We're only a lockdown away from a completely different story in the next 12 months." 

Wednesday's annouuncement from the Reserve Bnak comes as the country faces a historic labour shortage, with numerous industries crying out for skilled workers. 

"It's pretty stark at the moment," noted Bagrie. 

That’s according to an economic forecast from ASB.

"We seem to be in a zone of maximum sustainable employment which is what we call full employment." 

While it's a "good economic story," businesses are going to need a rethink at how they operate in the future as New Zealand's economy looks to face some "pretty big structural problems". 

"We need to look at what we can do to boost supply and improve functionality of the labour market," he said. 

"Firms are going to need to be investing more in technology and iinnovation - they're going to have to look at capital intensive ways of going about their business."

On an alternative note, the shortage in labour supply is likely to drive up wages in the next year, he said, with the Government needing to address ways of curbing demand and moving New Zealanders into jobs were needed. 

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