It forecasts inflation to peak at 4.2% in this current quarter, then fall to (a still elevated) 3.6% in the December quarter.
Can the Reserve Bank really afford to ignore inflation that sits outside its 1-3% target band for that long?
Yes, Kerr says.
“We should look through it. If anything, demand has been hurt by this episode,” he says.
“It’s not Covid.”
“We came out of Covid like caged animals. Demand spiked because interest rates were at the lowest level in human history. There was a hell of a lot of stimulus. I think people are still scarred from that. I think the Reserve Bank’s a little bit scarred from that.”
The difference this time is that economic demand remains weak, he says.
Kiwibank sees inflation falling as low as 1.9% by the middle of next year.
That sounds good, until you see that it is a view based on ongoing economic pain.
It picks unemployment to rise again through the second half of this year and to peak at 5.6% in June next year.
Wage growth is likely to remain subdued.
“Our point is that the Kiwi economy was only recovering [prior to the Iran war]”.
“It wasn’t at any point looking like demand was going to get out of hand. I think it’s even more the case now.
“Lifting interest rates is only going to hurt those who are already hurting.”
Of course, when it comes to forecasting, there is a difference between what an economist thinks should happen and what they think will happen.
Kerr is adamant the OCR should stay on hold until after the election at least.
But they’ve told us they’re going to do three hikes this year, he says.
“I’m not in that camp, but I see a central bank that’s kind of talked itself into that point.
“I think they will hike. They’ve told us they’re going to 3% this year,” he says.
“I hope they water that down. One or two hikes this year would be more than enough.”
But despite market odds that still imply the OCR will be lifted from 2.25% to 2.5% next Wednesday, Kerr believes lower fuel prices in the past few weeks will provide the RBNZ with an opportunity to pause, at least until September.
Kerr is hopeful. His experience of travelling around the country and talking to businesses has convinced him that more time with stimulatory settings is needed to bring confidence to an economy that has been battered by downturns and false recoveries for more than three years.
He says he always asks businesses: Are you investing?
“And the answer’s pretty much no.
“There’s always a handful of people that are looking through this and have the ability to do stuff, but most of the people that I speak to are sort of sitting on their hands when it comes to investment.”
That means they are also sitting on their hands with regard to hiring, he says.
“Right here, right now, the wage rate’s running at 2%. We’ve got a very soft labour market with a 13% underutilisation rate. So there’s plenty of slack in the labour market.”
He notes that the labour market lags economic activity.
“So what we’re seeing today shows up in nine months’ time,” he says.
By then, the supply shock inflation will have played through the economy.
“We’re not forecasting the unemployment rate to fall meaningfully this year at all,” he says.
“It’s a 2027 story now. And that’s frustrating, like we’re just continually sort of pushing out this forecast recovery.
“Couldn’t that be great if they left interest rates at a level that enables a bit more demand to come through?”
But might that raise the risk the RBNZ needs to hike more later on?
“That doesn’t bother me at all,” he says.
“What bothers me is the risk/reward in allowing the economy to limp along as it has over the last couple of years.
“I wouldn’t mind a period of recovery.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.