On 2 September the Reserve Bank lifted the Official Cash Rate to 2.75 percent. That is a decision to make loans cost more - on purpose - and I wanted to understand why anyone would want that.
On Wednesday 2 September, the Reserve Bank of New Zealand raised something called the Official Cash Rate from 2.5 percent to 2.75 percent. It was the second rise this year. In July the rate went up from 2.25 percent.
Here is the part I could not get past. Everyone reporting it agreed on what the decision does: it makes borrowing money more expensive. Loans cost more. Mortgages cost more. And the Reserve Bank did it deliberately, knowing that.
Nobody normally decides to make things harder on purpose. So there had to be a reason, and I went looking for it.
The Official Cash Rate is one number, set by a committee, about eight times a year. It is the interest rate the Reserve Bank uses with the banks. Banks borrow and lend at rates that follow it. So when the OCR moves, the rate on a home loan usually moves in the same direction, and so does the rate a bank pays you for money you leave in a savings account.
That is the whole mechanism. One dial, one direction, and a lot of things attached to it.
The reason for turning the dial up is inflation. Inflation means prices across the whole country rising. Inflation of 4.1 percent in the June quarter means that, on average, things cost about 4.1 percent more than a year earlier. The Reserve Bank said a big part of that was higher fuel prices, coming from conflict in the Middle East. When fuel costs more, so does anything that has to be driven, flown or shipped to you. Which is nearly everything.
The Reserve Bank has a job given to it by law: keep inflation low and steady, aiming for the middle of a one-to-three percent band. At 4.1 percent, inflation is outside that band. So the committee acted.
Now the strange bit, which is really the answer to my question.
Higher interest rates cool prices down by making people spend less. If your family's mortgage payment goes up by fifty dollars a fortnight, that fifty dollars is not going into cafes, new shoes, tools or trips. Multiply that across a country. Shops sell less. Shops stop putting prices up as fast, because if they do, nobody buys. Prices settle.
So the Reserve Bank is not trying to punish borrowers. It is trying to slow the whole country down slightly, on purpose, because it thinks fast-rising prices do more damage than a slow economy. That is a judgement, not a fact, and that is exactly why people argue about it.
The Reserve Bank's own argument, in its statement, was that acting now reduces the risk that the rate has to rise even further later. Some economists agreed and expected the rise. Others warned it could stall a recovery that is already weak, and that people who have lost work will feel it first.
Both of those can be true at once. That is what makes it a decision and not a calculation.
One thing worth knowing: the same move that hurts if you owe money helps a little if you save money. Higher rates mean a savings account pays slightly more interest. If you have a bank account with birthday money in it, this decision very quietly made it grow a tiny bit faster.
I do not think there is a version of this where nobody loses anything. There is only a choice about who carries the cost, and for how long.
Question for the reader
Imagine you get to set one dial for the whole country, and you only get the one dial. Turning it up makes prices rise more slowly, but makes loans dearer, makes people spend less, and can cost some people their jobs. Turning it down makes borrowing cheaper and gets people spending, but prices climb faster, so the money in your hand buys less each month.
Which way would you turn it - and here is the harder half of the question - who would you check with first?
Because the people affected are not one group. Somebody paying off a house wants the dial down. Somebody living on savings wants it up. Somebody whose rent follows their landlord's mortgage wants it down, urgently. Somebody watching the price of bread wants it up.
The Reserve Bank committee is not elected. That is on purpose too: the idea is that this decision should be boring and predictable rather than something politicians promise to change before an election. But it means seven people who nobody voted for can change what your family pays each fortnight.
Do you think that is the right way to do it? If you would rather it were decided by people we elect, what would stop them promising cheap loans every three years? And if you would keep it as it is, how would you explain that to the person whose payment just went up?
I do not have a settled answer. I have a much better idea of the question than I did on Tuesday.