The Reserve Bank may have just decided the election

If there's one thing voters love it's a recession, high interest rates, and inflation - all at once!

The Reserve Bank under construction. The Bank is currently building the conditions for a recession. Credit: Winder, Duncan, 1919-1970: Architectural photographs. Ref: DW-4135-F. Alexander Turnbull Library, Wellington, New Zealand. /records/23219676

Good morning and welcome to the third Museum Street. I am writing to you from my phone on the way to an airport so this may be the shortest post yet.

Labour’s chances of winning the next election have not looked amazing for most of this year, as Christopher Luxon found his feet in opposition and inflation lashed the economy.

But they’ve rarely looked hopeless. If you include the Māori Party in the “left bloc” it has been ahead in the polls a few times, or very narrowly behind. Plus the polls underestimated support for the left at the last election - maybe they would do it again? You wouldn’t need a huge polling error to keep Jacinda Ardern safely in the 9th floor, and she remains ahead on preferred PM.

That path became significantly more difficult yesterday when Reserve Bank governor Adrian Orr announced not just a 75 basis point OCR hike (the largest ever) to 4.25%, but also an intention to hike even further - all the way to 5.5%. ANZ think it will go even higher.

Jenée Tibshraeny @JeneeTibshraeny

ANZ economists: "We have revised up our forecast OCR track, adding to our existing 75bp hike in February a 50bp hike in April and a 25bp hike in May, which would take the OCR to a peak of 5.75%."

This is expected to take New Zealand into a recession, as mortgage rates rise, house prices fall, and people cut back on their spending seriously. (This is the intended effect - the conventional wisdom is that the inflation is caused by an excess of demand chasing a shortage of goods.)

While Orr expects it to be a “shallow” recession this could potentially harm the main economic figure Labour has going for it - very low unemployment. And it isn’t expected to bring down inflation before 2024 anyway. Indeed, the Reserve Bank expects it to peak next year.

To recap: This means an election year with mortgage rates at almost 8%, inflation stubbornly high, and a recession. Now this could be worse - I live in the UK right now and the OECD are predicting a worse time for us - but those global comparisons only get you so far.

To add to Grant Robertson’s woes, National have used this horrible forecast as an excuse to take a look at some of their more politically dicey promises, in particular the promise to get rid of the top tax rate - which only effects about 1% of Kiwis. Christopher Luxon now says all of their tax policy - which was previously to reverse basically everything Labour has done - is now under review, except for the more popular indexation of income rates, which will actually help normal middle class people.

Because Luxon decided on this huge u-turn in the middle of an extremely busy news day, it did not dominate the all-important evening news*. Everyone’s too busy worrying about their mortgage.

I wrote about the possibility of Luxon backing down on this tax cut doing a while back. (Sorry can’t do links on the phone - so enjoy a tweet.)

henry cooke @henrycooke

Will Christopher Luxon fall into the same tax trap Liz Truss has? My latest column in The Guardian:

theguardian.comWill New Zealand’s opposition fall into the same tax trap as Liz Truss? | Henry CookeNew Zealand and the UK both have top tax rates that raise little revenue but lie as potent political traps for parties on the right

Essentially Grant Robertson laid National a trap: A tax cut that only the richest would pay but National wouldn’t be able to resist promising to cancel, meaning Labour would have attack lines about them helping out their mates all year. (Of course the actually richest New Zealanders would be far more worried about a wealth tax, given that’s where all their money is - but Robertson won’t touch that.)

For a while this trap worked. But now National look to be sliding their way out of it - and will be able to use the Government’s supposed profligacy as an excuse.

This is not entirely risk-free for National, as it opens up some more space to their right for David Seymour. Now ACT votes would end up supporting a National-led government anyway - but he will still want that potential Government to have as big a National Party as possible. Labour’s best hope will be in tying National as completely as possible to ACT.

There’s much more to say about this but I have to run. If you want a good idea of how we got here, I highly recommend this podcast:

Thomas Coughlan @coughlthom

On the tiles with @JeneeTibshraeny this week. Had a great chat with ex-acting governor of RB about monetary policy dramas, RB review and some fiscal policy.

nzherald.co.nzEx-deputy governor criticises Reserve Bank review, policies - and offers tax cut warningGrant Spencer talks to the On the Tiles podcast about recent monetary policies.

See you next time!

* Correction: The original version of this story said it hadn’t been a story ahead of the first break, based on a conversation I had misunderstood in a rush. I didn’t check this (NZ TV is blocked here) and apparently Newshub had a segment ahead of first break. My apologies to the readers and most of all to Newshub for this error.