Cameron Bagrie: Independent economist comments on interest rate cuts

Economic consultancy Infometrics says the impacts of the latest OCR cut probably won't be felt until mid to late next year - by which point the economy will be growing. 

It could mean greater inflation - with predictions the OCR will rise again as early as late next year. 

Independent economist Cameron Bagrie told Ryan Bridge that caution is needed.

He says if the economy does kick into gear, there could be capacity issues, and inflation could rear its ugly head again. 

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Episode Transcript

Speaker 1 (00:00):
Infametris brad Olsen's outfit reckons we might be overcooking it
with interest straight cuts. They say, the cats have gone
so far that they've done their job. The effects won't
be felt until mid to late next year. Too much
stimulus and we get all too excited again and then
facing tickles up and then rate hikes from late next year.
Independent economist Cameron Bagriy with me this morning to chat

(00:21):
about it.

Speaker 2 (00:22):
Good morning, Cameron, Well, good morning, Nice to see you back.

Speaker 1 (00:25):
Yeah, good to be back. What's the situation here? Do
you agree with this?

Speaker 2 (00:31):
You can argue both sides. If you look at the
gross side of the equation and the gross side of
the equation, the New Zealan at the moment are still
pretty ana. So the reserve ends well justified by looking
at the climbing it up to the defaibilated and giving
a little bit of a shock so to speak, of
the form of a law psial cashrop. The other side
is that given the economy, a little bit more juice

(00:54):
is not without risk, and head blind inflation is moving up.
Core inflation looks a lot more contained. But this is
the reserve bank that they just need to be a
little bit weary here because if this economy is kicking agear,
and I think it is going to kick in the
gear into twenty twenty six, you could hit some capacity
constraints pretty quickly. You hit capacity constraints pretty quickly, FLAC

(01:17):
starts to wear its ugly head again. And for a
lot of people out there, Brian, most people do not
think heed by inflation is two point because you're seeing
your electricity bill move up at a double digit clip,
your rates bills moving up at a double digit clip,
medical bills, they cost of food out there across the
country as well.

Speaker 1 (01:36):
What's worse for the Reserve Bank going hard now and
risk reversing later, or you know, letting the pain drag
on and staying on one course.

Speaker 2 (01:45):
It's a Clayton's choice. We're welcome to being a central
bank and they need a lot of it's about risk
risk management, and the Reserve Band obviously decided after getting
that week GDP number for Q two, but they needed
up the NTY a little bit. But if you go
through their document, you know their statement, their minutes now
they are still wary about some of those inflation risks

(02:06):
because as I said, yeah, headline inflation is moving up.
They're not focused on head by inflation. They're focused on
core inflation. That looks a lot more sedate. But there's
whole lot of things out there at the moment that
the reserve band can't control. You know, one of the
big problems for a central bank is that that they
sort of know where the economy is through a demand lens,
but they don't know where the economy is through a

(02:26):
supply lends. Yeah, this is how last the economy can grow,
the combination of immigration, capital, the combination in line with
productivity growth. And what we know is that that line
is a very weak number. And if that line is
even weaker than what the reserve band is estimating, we
get hit capacity constraints very early in twenty twenty six.

(02:46):
On the assumption that this eclonomy is going to kick
into gear, there's a whole lot more people roll of
those fixed mortgages, and we know there's a lot of
stimulus in the pipeline.

Speaker 1 (02:54):
When it kicks into gear because it's been so long
and dragged out. When it kicks into gear, does it
kick in it third gear? Are we going to suddenly
bolt out the gates?

Speaker 2 (03:06):
I'm not convinced to get a bolt out of the gate.
And one of the reasons I'm not convincing in a
bolt out of the gate is the economy is not
just driven by what's called the cyclical leaders and a
cyclical letters of things such as interest rates coming down,
how much money to get it's pumping in. It's how
much makeey the farmers have got. That's the giesel one dollar.
It's the likes of that three point two bidion that

(03:27):
could hurt farmers wallets in the form of their consumer business.
So we know there's a there's some pretty big checks
that they're going to come in. But to get the
economy ready kicking into gear, you need to see the
housing in a pretty pretty good space. Because the housing
market's got about three speeds for neutral and reverse. If

(03:47):
you've got a shortage of supply, you can't interstrates, then
you can have typically one hall of a construction boom.
You know what we got out there at the moment,
is it your population growth raout is to supply I
building consents. It's all looks like we're building too many
houses as opposed to not enough. Housing valuations are not
exactly what you're called cheap. There's a whole lot of
other economic fundamentals across this economy. If you look at

(04:11):
our infrastructure, you look at shortage of energy, if you
lot at what's going on in regard to the quality
of the routing system. These things just told the economy
back through a structural lens. And these are areas that
the Reserve Bank cannot fix by cunning interest rates. Only
time can through some good economic policy.

Speaker 1 (04:30):
Cameron Bagri and lead economists at Bagery Economics appreciate your time.
This morning is always interesting stuff. For more from Earlily
Edition with Ryan Bridge, listen live to news Talks it'd
be from five am weekdays, or follow the podcast on iHeartRadio.