Ask Susan: Isn't more unemployment what the Reserve Bank wanted?

3:57 pm on 17 August 2024
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RNZ's money correspondent Susan Edmunds. Photo: RNZ

If you have a question you'd like answered, email susan.edmunds@rnz.co.nz

I feel like I have heard the Reserve Bank saying it wants more unemployment, as part of its efforts to bring down inflation. It seems to be like a broken system if we need more people to be unemployed but then we slap them down when they are unemployed?

You're right that the Reserve Bank has been trying to slow the economy to bring down inflation - it talked quite early on about engineering a recession. This week it indicated that the effect of monetary policy has probably been so strong that it's going to have sent us into another one, too.

As part of that, unemployment rises. (The government last year removed the Reserve Bank's dual mandate which required it to both maintain price stability and support maximum sustainable employment - though commentators say that probably wouldn't have changed its recent calls very much, anyway.)

Reducing employment also takes pressure off inflation because when there are more people competing for jobs, employers don't have to pay wages that are so high, which reduces the rate of pay rises. Fewer pay rises means less money for households to spend, and less pressure on businesses to put up prices to pay the higher wages... and so on.

Council of Trade Unions economist Craig Renney, who used to work at the Reserve Bank, says people should think of the Reserve Bank a bit like a robot: "It's been told to reduce inflation to the target point and it's got tools to do that, everything else is someone else's problem."

It's not setting out to make people miserable by making them unemployed, it's just a side effect of what the bank has to do.

BNZ chief economist Mike Jones notes the lift in unemployment so far has been less about widespread layoffs and more reflective of hiring slowing right down, at the same time that there are more people available for work due to factors such as migration.

"But we may see that change as we push through continued challenging economic conditions over the second half of this year."

I am due to inherit around $250,000 when the Public Trust finalises the papers to be signed over from my mother's will. With your knowledge on financial matters, what would you do with this sum of money?

If it were me, I'd probably pay off my mortgage. But what you should do with the money is a different question!

It will depend on lots of things - your debt, your income, your goals, your other investments... a good place to start is probably to have a meeting with a financial planner or investment adviser who can give you an outline of what might be sensible, given your individual circumstances.

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