Nicola Willis: Finance Minister on the OCR being cut to 2.5%, potential inflation spikes

The Finance Minister says she's okay with a short spike in inflation. 

The Reserve Bank has slashed the cash rate 50-basis-points to 2.5% and is leaving the door open to further cuts. 

It expects inflation to reach or surpass 3% in the short term but believes the economy is weak enough to push inflation back down again next year. 

Nicola Willis told Mike Hosking we won't see another long-period of sustained much-higher inflation. 

She says a little blip's okay, but the three years of high inflation under the last government is not okay. 

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Episode Transcript

Speaker 1 (00:00):
Back to the business of the ocr cash rate now
at two point five could be lie by Christmas. Government
saw it as good news. Nikola will As, the Finance
Minister back with us. Good morning and good morning to
you mane the claim, I think it was from Labor yesterday.
The RB's doing the work for you, fair or not.

Speaker 2 (00:14):
No, the RBNZ is doing its job, which is to
manage inflation and ensure stable output in the economy. And
I think that reducing the official cash rate by fifty
basis points is their logical reaction to the economic data
they are seeing.

Speaker 1 (00:28):
Do you think there's more where that came from.

Speaker 2 (00:31):
Well, they've certainly left that open in their statement, haven't they,
by saying that they will continue to monitor developments and
be prepared to go further. And that says you'd expect.
That's exactly their job, to keep monitoring developments and do
what's right to keep inflation down in the medium turn.
But consistent with what they're seeing happening in the economy.

Speaker 1 (00:48):
Do you think inflation will breach three and if it does,
do you worry?

Speaker 2 (00:52):
Well, that is what some of the forecasters are telling
us that it could in the first next three months.
Go over three, that would be temporary. What the Reserve
banker observing is there's a lot of capacity in the economy,
so they don't see the threat of inflation persisting at
that level. And what they were confidently predicting yesterday as
they expect it to come back down to that two

(01:13):
percent range in the first six months of the next year.
So that's what you want to see. A little blip's okay.
What's not okay is three years out of target as
it was under the last government.

Speaker 1 (01:23):
That is true. Having said that, what worries me is
the three of its gets breached and I have no
doubt at will is not being driven by growth. It's
been driven by cost plus accounting and that still doesn't
appear to be contained, does it? And what do we
do about that?

Speaker 2 (01:36):
Well, one of the major factors is literally those rates increases.
They are having an outsize impact on the overall inflation basket.
While you're seeing inflation actually falling for a number of categories,
prices falling in real terms, rates disproportionately are pushing up
that overall number. And that's why where you're hard at
work are looking at proposals for a rates cap because

(01:57):
we can't let councils keep holding the economy me to
ransom in that way.

Speaker 1 (02:01):
No. I was watching question Time again yesterday Prime ministers
suggesting there's growth in Q three. I'm not sure he's correct,
are you. Well?

Speaker 2 (02:09):
Obviously there's always a mixture of data, but the Treasury
continue to tell me that's their forecast, and that's that's
currently the Reserve Bank put out yesterday. Yes based on
the data they're seeing, they're still predicting that. What you
saw the Reserve Banks say yesterday is that they still
think there will be growth having occurred in Q three,
if a little more muted than was being expected. But
there's a mixture of data and so we will see.

Speaker 1 (02:32):
And because the Nzier the stuff that they looked at,
the last thing they looked at yesterday before they made
their decision said flat at best, contraction at worst.

Speaker 2 (02:40):
Can I just point out something really important about that survey.
It does not directly survey agriculture, and that is a
sector that is of course enjoying exceptionally strong revenues overall
outright and relative to other sectors. So that survey is
very important, it is relevant, but it doesn't include that
sector and I'm sure that the bank factored that in

(03:01):
as well.

Speaker 1 (03:01):
How worried about the labor line are you? They rolled
it out yesterday as well. And that is that, rightly
or wrongly, people in the poll came out to back
it up. Rightly or wrongly, people tend to believe what
they're telling them, and that is that you've bollocked this
economy and the facts back that up. How do you
counter that?

Speaker 2 (03:19):
Well? First of all, I meet intelligent New Zealanders every week.
Case Statami, Gosh, they really did trash the place, didn't they.
You are having to do a very very difficult tidy up,
but thank goodness you're there. And second of all, I
remain completely confident, Mike that this economy will be back
to strong growth by the time we go to the polls.
And that's ultimately what New Zealanders will judge us on,
as well as what are the alternative policies on off

(03:41):
because so far they've suggested a higher inflation target, more taxes,
and more borrowing. New Zealanders are smart enough to know
that won't work.

Speaker 1 (03:48):
Well. It'll be an interesting year, I guess. On related matters.
Have you read the newsroom piece on Adrin or's restraint
of trade. I did read that your conclusion.

Speaker 2 (03:59):
That it says said it is, which is that the
Reserve Bank had an employment agreement which was agreed under
the last minister. They applied that to the negotiation of
the exit agreement with Adrian or.

Speaker 1 (04:11):
The summation I got out of it. In the Zeichbarm
guy they keep quoting there is no scenario for a
restraint of trade and what it was really about was
shutting him up, And there might be some sensitivity around
some of the things that he might have said, should
he not have been shut up, and that might have
involved you in your government.

Speaker 2 (04:27):
No, I don't think so, because that restraint of trade
cause was negotiated in there when he was first appointed,
it was there under Grunt Robertson. It's actually been a
feature of previous governor employment relationships. So they were literally
following the letter of the agreement, which means that no
matter what the terms were of his exit, he would
have that six months restraint of trade. So I think

(04:48):
that was an overread of what are pretty plain facts.

Speaker 1 (04:50):
All right, appreciate your time. The Finance Minister, Nikola Willison.
That was interesting, wasn't the nzier thing. I didn't realize
they didn't really do agriculture. The next questioning obvious I
would have thought, is why not anyway? The article I
reference is a very good one by Jonathan Milne in
the Newsroom website or what question mark ex Reserve Bank
Governor's tenuous restraint of trade payout. It's, as all things

(05:12):
are generally on the newsroom site, a lengthy old piece.
But he goes, we don't exactly know what all his
clause is meant to restrain him from doing. After all,
in two thousand and two, the former governor Don Brash
walked out the door at Number two the Terraces held
a press conference announcing he'd be seeking election as a
National Party MP. That same year. Three months later, as
an MP, or walked out the door March Fire, but
his term as governor didn't end until much thirty won

(05:34):
That took his six month restraint period through to the
thirtieth of September. So this Zichbalm guy that keep referencing
in the article says he can see no scenario in
which a restraint of trade would apply. The answer is none,
and that is not an insignificant sum that we're talking
about the half million dollars or thereabouts masquerading as a
restraint of trade. Adrian or had confidential information, but more

(05:55):
to the point, he was a party to the unsavory
proceedings before his departure. There was such a heightened level
of sensitivity around the circumstances of his departure and what
prompted it that they tried to seal it off. Doom
doo doo. Anyway, I read the whole article and make
up your own mind.

Speaker 2 (06:13):
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