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OCR hike will add to inflation and hurt less well off

14 April 2022

by Chris Leitch, Leader

The orthodox attempt by the Reserve Bank to control inflation by lifting the Official Cash Rate by 50 basis points will hurt beneficiaries, superannuitants, and the low paid with a double whammy effect as businesses recover their additional interest charges by pushing up their prices.

 

Rising mortgage payments and rising rents will exert real pressure on those already struggling to make ends meet and the increased costs due to supply chain issues will add even more.

 

What the bank has done is like adding more fuel to a fire that is already out of control.

 

It’s put pressure on businesses, the very sector of the economy that needs to retain staff and ramp up production of goods and services to meet the demand in the economy.

 

The Reserve Bank should have curbed the avalanche of mortgage money creation that has been indulged in by the commercial banks - over $98 billion in the last twelve months, five times their total average yearly money creation for all types of lending.

 

The increase in the OCR will also add to already record commercial bank profits in a year when most other business have been doing it hard.

 

The Reserve Bank needs to establish just who is in charge of the country’s financial system, itself or the commercial banks.

 

It should direct banks to cut interest rates on working capital for businesses and channel a greater proportion of their lending into the business sector, allowing manufacturers to expand, invest in new technology to overcome the shortage of workers, and increase production.

 

It could have adapted its Funds For Lending programme to provide reserves for banks at zero interest provided the banks make a significant cut in lending rates on working capital for businesses, and fund start-ups to produce much more of what New Zealanders need right here to reduce the reliance on imports.

 

Falling into the usual trap of raising interest rates will exacerbate the inflation problem, resulting in increased costs, reduced production and hardship for small businesses, home owners and those on fixed or low incomes.