Back in April 2023, a contributor to the Daily Blog, Mike Teen, wrote an article titled “Reserve Bank Interest rates rise to force a recession on NZ”. The piece outlined the desire of the RBNZ to foist a recession on the economy, with the Bank’s thesis being that higher unemployment was one of the key measures to bring down inflation. By June 2023, that prediction was borne out as New Zealand entered a technical recession. In 2024, those interest rates remain the same – at 5.5%, and there has yet to be concrete evidence of a pivot.
While Treen’s piece took aim at the RBNZ, it is worth noting that the same narrative was present in other advanced economies across 2023, although not all central banks were as overt in using the “R” word. Over in Australia, the Reserve Bank of Australia (RBA) set out a similar pathway, and the same went for the Federal Reserve and Bank of England. The latter arguably shared the most parallels with New Zealand in terms of rhetoric coming from the central bank.
The world over, currency and bond traders used that information to trade inflation and interest rates, which impacts these markets It didn’t matter if you were an expert scalper on a trading platform Australia, NZ, US, or UK site, bets flooded into short and long currencies and bonds with respect to interest rates. But for the common worker, the message was simple: make people poorer so inflation will come down.
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The ire aimed at central banks was palpable
Our purpose here is not to write a dissertation on the global economy and its challenges in 2023 going into 2024. Rather, it’s to take a moment and consider the absurdity of the situation. As we said, there were parallels between the UK and New Zealand in 2023, and that also came through in terms of the anger directed toward the central bank and the government, of course. In April – around the same time as Treen’s piece – the Chief Economist of the Bank of England, Huw Pill, claimed that Britons needed to accept that they were poorer. As you might expect, the comments went down like a lead balloon. Pill was forced to apologise for his remarks, but it gave an insight into the thinking of the central bank. And you can guarantee that this thinking wasn’t limited to the Bank of England.
In New Zealand and elsewhere, we were thus treated to the exceptionally hard-to-swallow narrative that pay rises were a bad thing. Pay rises for bankers or the well-to-do were never really in focus; of course, it was almost always pay rises for workers – the people who run our hospitals, trains, and factories. Thus, we entered a kind of paradoxical situation: People wanted – needed pay rises – due to the rising cost of living, but they were told that they could not have them as it would exacerbate the cost of living.
Price-gouging added to inflation woes
At times, anger was arguably misplaced at central banks, at least in the sense of holding them wholly culpable. The economic orthodoxy is for central banks to lower and raise interest rates, mostly to combat inflation. That’s their job, and they don’t have any other weapon to combat inflation. Yet, the government does. The narrative focused on ordinary people driving up inflation. But price-gouging and record profits were seemingly inconsequential. The outrage at this was covered in another Daily Blog article by Martyn Bradbury, published in May 2023. The piece quoted several studies that all drew similar conclusions. Namely, that inflation is caused by banks, corporations, and “price setting by firms with market power”.
Now, we are in 2024, and inflation is coming down, albeit not as fast as any of us would like. All eyes will be on the pivot from the RBNZ and central banks across the world. Yet, arguably, too much focus is placed on lowering interest rates as a panacea for all economic ills. The act of lowering rates – and who knows when it will come – will likely take a long time to filter through to the average worker, even if it impacts them at all. Aside from mortgages, lower rates tend to help those at the top of the food chain, such as those with the funds to invest. For those struggling to make ends meet, it’s worth noting that we are not going to suddenly experience deflation.
Yet, regardless of what happens with interest rates – and prepare to keep hearing the term “sticky inflation in the coming months – we return to our original head-scratching sentiment of the last 18 months: The goal of central banks to make people poorer to combat inflation. Yes, not everyone said it out loud, but the sentiment was there. And it should really force us to start asking fundamental questions about our economic system. If a central bank can’t help working people in times of high inflation and, in fact, its actions exacerbate their woes, then we must question its purpose.
