Michael Reddell: Former Reserve Bank Economist on the likely way the Reserve Bank will respond to the drop in the GDP

There's uncertainty if the Reserve Bank will change tack following the revelation of New Zealand's deep recession. 

Stats NZ figures out yesterday show GDP fell 1% in the three months to September. 

It’s also revised the preceding quarter down to 1.1% contraction. 

Former Reserve Bank Economist Michael Reddell says it did achieve its goal of bringing inflation under control. 

He told Heather du Plessis-Allan he doubts they'll ramp up the size of OCR cuts next year in response to the recession. 

Reddell says it's more likely they'll go ahead with a 50 basis point cut, then tail them off next year. 

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Episode Transcript

Speaker 1 (00:00):
Question, of course, is what does this say about the
Reserve Bank, who deliberately engineered the recession that we find
ourselves in Former Reserve Bank economist Michael Radella's with us. Hey, Michael,
do you think the Reserve Bank has made a mistake
sending us to a three month summer break with an
ocr setting this high above neutral?

Speaker 2 (00:17):
I mean the three months summer break as a bad
core always has been on their part. The data do
come through and they need to be able to respond.
The government tells us that, you know, they can have
emergency meetings if they need to, but it's always going
to be a very high threshold for that, so they
should have changed that calendar. The bigger question still is

(00:37):
they held monetary policy too tight for too long. You know,
it's only six months ago they were talking about raising
rates further. That was just clearly out to lunch.

Speaker 1 (00:45):
Have we met the threshold for them coming back during
the break? Do you think No?

Speaker 2 (00:49):
I don't think so. I'd be really surprised. They'll be
looking now towards the CPI coming out in the second
half of January, and they wouldn't want to do anything
before that month that's come out. But I have to
work the numbers through their forecast, and then they'll go,
it's only three weeks until I are next, and so.

Speaker 1 (01:06):
What do you reckon seventy five basis point in February?

Speaker 2 (01:09):
Oh, I think that's still a big call. I think
you know, they were talking pretty confidently at fifty points
in February at last, the NPS. I think that's still
the most likely move. What's more likely is that we
see a continued succession of cuts during next year. You know,
he's had a number of economists going, look, I had
fifty points in February, and then things might start to

(01:30):
tail off quite rapidly. I suspect what we'll see if
inflation continuing to fall away faster, and they'll need to
be cutting rates towards three or maybe even under three.
But remember the next year, what do you.

Speaker 1 (01:41):
Reckon Adrian or thought when he saw that number yesterday?
Do you reckon that was what he wanted? Or may
have realized that he overcooked everything.

Speaker 2 (01:48):
I'm sure it wasn't what he wanted. His focus, and rightly,
central banks always focused on the inflation numbers. Inflation has
been coming down a bit faster, and they appreciate it.
But they'd already got beat in the bag. We'll look
at that and go, oh my goodness, you know what's
happened here. Some of that, of course, is about those
revisions from statistics New Zealand. The Reserve Bank can't control that.

(02:09):
But some of it, standing back still, is that we
had a really big inflation probably a couple of years ago,
and it was always likely that it was going to
need something pretty naicey to get that down. In some ways,
it's puzzling that other countries haven't needed something quite so
bad yet, but there are still challenges there in the US,
for example, where they're saying, look, you know, maybe inflation
hadn't come down as far as we would have liked.

Speaker 1 (02:30):
Michael's good to talk to you. Thank you, Michael Ridell,
former Reserve Bank economists. For more from the Mic Asking Breakfast,
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