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New Zealand needs to make good economic choices to keep its quality of living. Image / Getty
EDITORIAL
Victory has been declared in the war on inflation.
We don’t see official Consumer Price Index inflation figures for the third quarter until next Wednesday. However, the Reserve Bank is so confident the topline figure will be back below 3%, it was comfortable cutting the
Official Cash Rate (OCR) by 50 basis points.
“The committee assesses headline consumer price inflation to be within its 1-3% target band in the September 2024 quarter and to remain around the midpoint in the medium term,” it said in the review of the Monetary Policy Committee meeting.
That’s something to celebrate. Aside from the relief we should feel in our back pockets, it is a reminder some sort of normalcy has returned to our economy.
But the victory has been hard-fought.
The combined effect of the inflation shock through 2021 and 2022 and the pain of interest rate hikes through 2023 has battered businesses and left consumers shell-shocked.
It’s not clear how quickly confidence will return. The upbeat reaction to this week’s rate cut suggested a great deal of relief and considerable optimism the economy had turned a corner.
“Double whammy, double happy,” said Finance Minister Nicola Willis.
Property and retail groups issued celebratory press releases and those refixing mortgages in coming weeks reached for their calculators.
The cash injection for the economy is not insignificant. But as we should have learned from the pandemic years, cash injections don’t create wealth.
Lower interest rates will deliver the conditions for wealth creation if we do the right things and have the confidence to invest.
Building momentum for real economic growth will take more time. For many businesses, rate relief will just enable them to keep trading.
In fact, for some it will come too late. Statistics will likely show business receivership and liquidation continuing to rise in the months ahead.
We’ll see more layoffs and job losses. Unemployment is expected to rise through the next year to a peak of about 5.5%.
This lagging pain is typical in economic cycles.
Sadly, it may be another 12 months until we can really judge the full extent of the damage the pandemic cycle wrought on the economy – the stimulus, the inflation and the tightening of the money supply.
Government efforts to make the regulatory environment less onerous for business will help the turnaround. The recent fast-track infrastructure announcements offer some hope for a flush of renewed activity in the construction sector.
There are headwinds. Population growth is slowing rapidly and may hit zero next year. Large numbers of Kiwis continue to leave and fewer migrants are arriving. Not surprising when there aren’t jobs for them.
And China – our largest and most valuable export market – is struggling with its own economic slowdown.
But for all these notes of caution, we can at least celebrate the return of price stability. It is the crucial building block for economic growth.
Now it is up to us, and our Government, to make good economic decisions and return to growth.
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