Since last week’s 0.75 percentage point increase in the official cash rate, there’s been much talk about a recession. Although it was a large increase in OCR, the talk has been more based around the commentary from the Reserve Bank.

The Reserve Bank mentioning in no uncertain terms that inflation must be tamed and that they are trying to engineer a recession. Of course, the media doing what they do, run with the story from multiple angles.

I think it is a very smart move by the Reserve Bank to publicly declare that they are trying to engineer a recession.

The increases in interest rates are not having the impact that they hoped.

A few reasons why:

• When people expect things to be much more expensive in the future as they do now with high inflation, they rush to buy more today than they perhaps would have under more normal circumstances.

• As inflation goes up, the price of goods and services go up, so even if people are buying less than previously, they could still be spending more due to higher prices.

• People are still flush with cash. Of course this doesn’t apply to a lot of people who are very much struggling at the moment, but there are still a lot of people doing extremely well. You only need to look at how much people are still spending to see that.
  

With the increase in interest rates alone not working, I think the Reserve Bank have decided to very deliberately use some very strong commentary around higher unemployment and recessions that no one likes to hear. Once the media circus latches on to that, it becomes widespread. Even people who have no interest in the economy, are now hearing about how bad things may be.

This widespread circulation of beliefs, may be the trigger the Reserve Bank needs to bring inflation down. The belief of a recession, addresses the three reasons mentioned above why interest rates are not coming down.

• It means people stop expecting prices to be so much more in the future and slow down their spending now.

• If spending slows down, then so too does the price of goods and services due to lower demand.

• Finally, if people are worried about a recession, they become worried about their own finances and job security. Personal savings tend to increase during times of uncertainty, and spending reduces.
  

Most of the media commentary has been around that awful Reserve Bank wanting people to lose their jobs to help bring inflation under control. Maybe I am giving them too much credit here, but what I think is that they are deliberately using scare tactics. I think they believe there is still a chance that we can tame inflation without creating significant unemployment.

Sometimes the thought of something bad happening is just as effective as that actual thing happening.

I know for myself, that any talk of a recession, always causes me to think what I can be do doing differently to help protect our family and our finances. Most of it we are doing already, as we have designed good structures for most circumstances. But nothing like fresh talk of a recession to make us look for even further ways to be better with our money and job security.

We shall see if New Zealander’s heed the Reserve Bank, and all of the media coverage, warning us to watch our spending. Only time will tell.

I hope that the warnings of the Reserve Bank don’t eventuate, but I am not calling their bluff either. As always, plan for the worst and hope for the best.

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