OCR: Luxon accuses govt of 'lost formation' on financial discipline

National Party leader Christopher Luxon says interest rates will have to go up because of the government's wasteful spending.

Luxon said the government is incapable of financial discipline.

The official cash rate is tipped to hit its highest level in nearly six years which will sting struggling businesses and first-home buyers.

The Reserve Bank is expected to announce another hike in the OCR, raising it by half a percentage point (50 basis points) to 2 percent.

It follows a similar-sized increase last month.

Luxon told Morning Report an increase of 50 basis points was the right course of action, given high inflation expectations.

He would prefer the Reserve Back was "fixated" on getting inflation back to the 1 percent to 3 percent band, however, Treasury was forecasting it wouldn't get back to 3 percent until 2025.

"So inflation's with us for some time."

He hit out at the Budget blowout which showed no financial discipline, no fiscal control, no delivery or outputs and spending of $9.5 billion.

If Covid-19 spending was taken out of the equation, there had been a 10 percent growth in spending annually since the government had come to power, Luxon said.

The government has "lost formation" on financial discipline, he said.

Luxon said Finance Minister Grant Robertson would not meet the surpluses he has forecast.

Asked what he would cut, he nominated the $327 million merger of TVNZ and RNZ.

"That's a solution in search of a problem... I don't know what problem the government is trying to solve... I'm just confused as to why the government is doing it."

Luxon agreed it would be wound back if National became the government.

He questioned why it was happening during a cost of living crisis and "the biggest Budget spendup we've ever had in the history of this country".

He also criticised a $208m spend for a firearms register for legal gun owners when illegal guns should be the priority (as evidenced by overnight shootings in Auckland) and $650m to help companies cut their emissions.

"The government confuses and conflates spending announcements with actually getting things done.

"There's something in the middle called delivery, execution and implementation and they just don't know how to get things done."

Luxon said while New Zealand is not at the top of the worst inflation affected countries in the world, the government is not doing enough to control the factors affecting domestic inflation.

The government has spent around $500m on wiping district health boards' debt in the latest Budget.

Asked if that was because of under-spending by the previous National government, he said the answer was to improve measurements of what was being achieved in the health system but instead the government has decided to restructure which will create huge levels of bureaucracy.

Recession fears

Kiwibank chief economist Jarrod Kerr said for the average home owner coming off a mortgage rate of around 3 percent interest rates are rising.

So mortgage rates will increase to around 5 percent, he said.

He told Morning Report he believes the Reserve Bank will stop when the OCR reaches 3 percent. If it went any higher, they would be "engineering some sort of recession", he said.

He said with growth occurring in the economy and a tight labour market the country was still sitting in a good position.

"But in order to get inflation down they have to attack the demand side and unfortunately most of the inflation we're seeing is coming through on the supply side which is a tough job and one I think where there's some danger."

Kerr said as migrants come into the country the unemployment rate will probably start to increase next year.

If it reached 5 percent the Reserve Bank would be worried, he said.

Asked about confidence to invest, he said it was dropping in the business sector in part due to the continuing pandemic.

"I think it's going to take some time for things to turn around."

Loan Market mortgage adviser Bruce Patten said a half a percent OCR ise would mean floating rates for mortgages would also go up by half a percent while fixed rates will only rise by point one or two of a percent because the market has already priced in most of the increase already.

Those with mortgages can probably expect to see the rates continue at similar levels for 12 to 18 months and they may even reach 7 percent.

Once inflation was under control, rates would fall again "but that's probably a couple of years away".