When it is released at 2pm, the full MPS with new forecasts and a new projected interest rate will give us a good steer on how the new governor and her team view the progress of the economic recovery and the inflation risk that might undermine it.<\/p>\n
It\u2019s expected the Reserve Bank (RBNZ) will move its forecasts for a rate hike from February to this December.<\/p>\n
You can read the full preview article here<\/a>.<\/p>\n There\u2019ll be no shortage of concern about the prospects of higher OCR and what the timing will mean for mortgage rates.<\/p>\n But rates have to rise.<\/p>\n At 2.25%, the OCR is set at a stimulatory rate to give the economy a boost.<\/p>\n It isn\u2019t supposed to stay this low, and we shouldn\u2019t want it to.<\/p>\n Economists and central bankers talk about the \u201cneutral rate\u201d. That\u2019s the rate where the OCR is neither stimulatory nor restrictive.<\/p>\n It\u2019s a level it should sit when an economy is growing at its potential, without overheating and causing excessive inflation.<\/p>\n Ideally, the OCR should sit at the neutral rate for long periods of time while the economy chugs steadily along.<\/p>\n Unfortunately, it hasn\u2019t been that way for several years now.<\/p>\n After the economic shock waves of Covid, New Zealanders have been on a rollercoaster of a monetary policy ride.<\/p>\n Rates were slashed to record lows to stimulate the economy through the pandemic. Then inflation hit and they were hiked to the highest levels we\u2019d seen since the days before the Global Financial Crisis.<\/p>\n Then they were slashed again to the current stimulatory lows.<\/p>\n We\u2019ve had six years of wild swings.<\/p>\n I\u2019ll leave it to the upcoming independent inquiry to give us a verdict on whether the RBNZ could or should have charted a more stable path through this era.<\/p>\n The questions now are: what is New Zealand\u2019s neutral rate? And when should we be back there?<\/p>\n Where\u2019s neutral?<\/p>\n The Reserve Bank estimates the neutral rate is somewhere in the range of 3-3.5%.<\/p>\n In a recent research note Westpac chief economist Kelly Eckhold put it slightly higher, at 3.75%.<\/p>\n Either way, that is a lot further north than where we are now.<\/p>\n Whether it\u2019s September or December or sooner or later than that, we should be under no illusions about the fact that the OCR will need to rise.<\/p>\n It seems to me that we\u2019re all watching for signs of a possible rate hike as if they represented some impending doom.<\/p>\n That shouldn\u2019t be the case.<\/p>\n If rates were to stay stuck at stimulatory levels for an extended period, it would be because the economic recovery had stalled.<\/p>\n The only reason rates would go lower from here is if something terrible happened to push us back into recession.<\/p>\n Nobody wants that.<\/p>\n So we should view rate rises as a natural part of the recovery story.<\/p>\n In today\u2019s monetary policy statement, I\u2019ll be looking for central bank confidence that the recovery is well and truly underway.<\/p>\n The timing of rate rises will remain speculative, but hopefully the direction of travel should be clear.<\/p>\n Crowded House<\/p>\n Q: In your recent article<\/a> comparing the transtasman economies, you suggest that government spending by the Australian Government is \u201ccrowding out\u201d the private sector.<\/p>\n While I understand the inflationary pressures of government spending when the economy is at capacity, I\u2019m confused by the idea that the private sector is crowded out.<\/p>\n Surely the Government spends into the private sector. Even the highly paid public servant or consultant eventually buys a flash car or invests in the stock market.<\/p>\n Can you elaborate on how government spending (when the economy is at or near capacity) somehow constrains the private sector?<\/p>\n John O\u2019Neill<\/p>\n A: Hi John, good question. The idea that public sector spending crowds out the private sector comes up a lot in economic commentary. But I\u2019ve used it a bit casually without really explaining it. It\u2019s also fair to say it\u2019s not an uncontested idea.<\/p>\n As you note, if an economy is already at capacity, then yes, extra spending could put upward pressure on inflation simply by adding competition to the labour market.<\/p>\n A simple example might be: if the Government decides to embark on a programme of building state houses during a construction boom, then it just increases demand for builders and materials, pushing up prices for everyone.<\/p>\n Yes, that Government money is flowing through to the private sector but it is inflationary.<\/p>\n That\u2019s why classic Keynesian economics would suggest that the Government should do its big spending when the rest of the economy is in recession and cut back spending when it is booming.<\/p>\n But there is another issue with the Government\u2019s spending that runs a bit deeper when we look at borrowing and what that does to interest rates and capital flows.<\/p>\n When a Government is spending, it is usually also borrowing to do so, and by issuing bonds into the credit market, it is soaking up the demand for debt.<\/p>\n That pushes up interest rates and makes it harder for the private sector to borrow and invest.<\/p>\n Green shoots (and a few weeds)<\/p>\n The last week of data has seen some interesting releases for the Reserve Bank to chew over before signing off on its Monetary Policy Statement.<\/p>\n Business expansion<\/p>\n Both the Performance of Manufacturing (PMI) and the Performance of Services Indexes (PSI) have continued to show healthy levels of business expansion.<\/p>\n The seasonally adjusted PMI for January was 55.2 (a PMI reading above 50 indicates that manufacturing is generally expanding; below 50 that it is declining). <\/p>\n Although it was 0.9 points lower than December, it was still above the average of 52.5 since the survey began.<\/p>\n \u201cThe January PMI provides further evidence that the economy has \ufb01nally turned the corner,\u201d BNZ senior economist Doug Steel said.<\/p>\n \u201cIt is consistent with our forecasts and a breadth of indicators suggesting decent economic growth.\u201d<\/p>\n The PSI also remained in expansion territory.<\/p>\n It was 50.9, although this was 0.8 points lower than December and below the average of 52.8 over the history of the survey.<\/p>\n \u201cThe big question to end 2025 was whether the economy may be turning,\u201d Steel said.<\/p>\n \u201cData since then has given us confidence that recent positive momentum can be sustained. The economy is growing.\u201d<\/p>\n Arrivals and departures<\/p>\n Net migration and tourism<\/a> numbers released on Friday were also strong.<\/p>\n \u201cMake no bones about it, today\u2019s migration and tourism data are consistent with an economy that is starting to hum,\u201d ASB senior economist Mark Smith said.<\/p>\n Migration data showed New Zealand citizen departures are now cooling, while non-resident arrivals are strengthening.<\/p>\n The provisional net migration gain was 14,200 in the year to December 2025.<\/p>\n That was up from 11,799 in the year to November.<\/p>\n Annual tourism arrivals lifted and were now back to 90% of their pre-Covid level, Stats NZ said.<\/p>\n Overseas visitor arrivals to New Zealand totalled 3.51 million in the December 2025 year, up 195,600 (6%) from the December 2024 year.<\/p>\n \u201cThe December 2025 year was the first annual period to exceed 3.5 million overseas visitor arrivals since the March 2020 year,\u201d international travel spokesman Bryan Downes said.<\/p>\n Spending dip<\/p>\n Electronic card transaction data<\/a> for January showed spending in the retail industries decreased 1.1%, or $78 million.<\/p>\n Spending in the core retail industries decreased 0.9% (or $60m), the Stats NZ data showed.<\/p>\n That\u2019s clearly not what we wanted to see.<\/p>\n But ASB economist Kim Mundy suggested the wetter-than-usual weather may have had an impact on spending levels.<\/p>\n \u201cWe had expected a decline, given the severity of the weather that impacted multiple regions during the month,\u201d Mundy said.<\/p>\n \u201cConsumables and durables were also weak and extended declines in December,\u201d she said.<\/p>\n \u201cIt\u2019s likely that the weather impacted spending in these categories, too.\u201d<\/p>\n 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.<\/p>\n To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz<\/a> and select \u201cMy newsletters\u201d. For a step-by-step guide, click here<\/a>. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz<\/a> or leave a message in the comments section.<\/p>\n","protected":false},"excerpt":{"rendered":"When it is released at 2pm, the full MPS with new forecasts and a new projected interest rate…\n","protected":false},"author":2,"featured_media":288881,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[1443,14772,14107,5782,14769,11774,10668,1951,14768,2082,305,42,191,26098,2944,296,14774,12514,14770,14776,6096,14771,130,43,6042,56155,31472,9831,14773,19257,33011,21501,10042,14777,14775,33285,7806,544,199,61,40,38,41,39,3270,686,6041,1845,4276],"class_list":{"0":"post-288880","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-headlines","8":"tag-about","9":"tag-burning","10":"tag-click","11":"tag-comments","12":"tag-deeper","13":"tag-dive","14":"tag-economic","15":"tag-economics","16":"tag-every","17":"tag-for","18":"tag-have","19":"tag-headlines","20":"tag-here","21":"tag-heres","22":"tag-inside","23":"tag-into","24":"tag-intricacies","25":"tag-leave","26":"tag-leftfield","27":"tag-liamdannnzheraldconz","28":"tag-message","29":"tag-missed","30":"tag-more","31":"tag-news","32":"tag-newsletter","33":"tag-panic","34":"tag-path","35":"tag-question","36":"tag-quirks","37":"tag-rate","38":"tag-rbnz","39":"tag-reveal","40":"tag-rises","41":"tag-section","42":"tag-send","43":"tag-shouldnt","44":"tag-sign","45":"tag-some","46":"tag-take","47":"tag-to","48":"tag-top-news","49":"tag-top-stories","50":"tag-topnews","51":"tag-topstories","52":"tag-we","53":"tag-week","54":"tag-weekly","55":"tag-welcome","56":"tag-why"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/288880","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=288880"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/288880\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/288881"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=288880"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=288880"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=288880"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}