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Inflation up but interest rates must come down

Written By: - Date published: 12:27 pm, July 15th, 2008 - 18 comments
Categories: economy - Tags: , ,

Inflation was 1.6% in the last quarter, 4% annually, the highest in 13 years.

Petrol is driving inflation. By itself petrol accounted for a 1.2% increase. Food is the other big increase, also accounting for a 1.2% and that is itself being driven by international oil prices. The price of oil is beyond our control and it is only going to keep going up. The only way to stop the rising price of petrol from continuing to eat up our wages is to use less petrol. It’s as simple as that. Government can lead the way by building up public transport and rail freight infrastructure.

Seeing as peak oil is driving inflation and their is nothing that monetary policy can do to fight that, there is no reason for the Reserve Bank not to bring down interest rates now. Domestic inflation is actually very low. Strip out food and petrol price increases that are coming from overseas and inflation was just 1.6%. So inflation within New Zealand is not a problem but growth is – high interest rates have helped tip us into recession.

It’s time the Reserve Bank stopped strangling New Zealand with high interest rates when the problem is coming from overseas. The only result is to weaken New Zealand’s economy when it needs to be strong. Stop punishing Kiwis for a problem they didn’t create. Lower interest rates.

18 comments on “Inflation up but interest rates must come down ”

  1. High interest rates? Our OCR is 8.25, inflation rate is 4% (biased downwards by subsidises last September as well) and the Bank’s estimate of the neutral “real” interest rate is 4.5%. Our current real interest rate is approx 8.25-4=4.25% – monetary policy is currently “stimulating” economic activity mate 😉

  2. Steve: Remember the 1980’s and the pain caused by high inflation? Reducing the OCR is no doubt politically expedient for Labour & NZ First but it would be a disaster for those who have savings ( not core Labour voters I know but surely it would hurt Winstons constituents).

  3. Tane 3

    Bryan, if the inflation is being driven from overseas through high oil and food prices then how is throttling the New Zealand economy with higher interest rates going to help?

  4. Peter Nelson 4

    We all know you want the CPI to decrease so to increse the labour vote, deal with the higher inflation next year. Govt spending is also being inflationary as well.

  5. Tane: Non-tradeables for the year is 3.4%, well outside the Reserve banks target band. Sure tradeables is 4.8& but it’s either pain now or a lot more pain later. It would be irresponsible to return to the double digit inflation of the 1980’s.

    Or does Labour want to see the retired lose all their savings ?

  6. Tane 6

    Bryan, I don’t know what Labour wants to do. I do know that I don’t like seeing low to middle income families unable to meet their mortgage payments. Manufacturers and exporters are also less than happy with the effect high interest rates are having on their businesses.

    And we’re not even remotely near double digit inflation, only a moron or a scaremongerer would suggest that’s the case.

    Peter Nelson, your comment doesn’t make sense.

  7. Solidarity 7

    If the reserve bank cut cash rates wouldn’t the corresponding drop in the dollar make oil even more expensive?

    I might be wrong but I thought that increased oil prices had a knock on effect with increased food and power prices as well.

    It seems the choice is either meeting the mortgage payments or keeping your household warm and fed.

  8. Tane: “I do know that I don’t like seeing low to middle income families unable to meet their mortgage payments.”

    As you know Tane the money that our banks use to fund home loans comes from overseas investors. The RBNZ cannot therefore directly influence the interest rate that home loan customers pay. This is determined by the perceived risk that the overseas investors see in investing in New Zealand. Acting in an irresponsible way could therefore do more harm than good.

  9. Solidarity: “If the reserve bank cut cash rates wouldn’t the corresponding drop in the dollar make oil even more expensive?”

    Good point. It’s the law of unintended consequences. Thats why the RBNZ is better off remaining independent, and the Reserve Bank Act needs to ensure that it doesn’t become subject to political fiddling ( as Winston Peters is so keen to do.)

    Tane: “And we’re not even remotely near double digit inflation, only a moron or a scaremongerer would suggest that’s the case.”

    Cast your mind back to Muldoon & the mid-seventies and remember how quickly inflation rose from single digits to upwards of 20% (less than a year) and how long it took to be tamed (around 15 years). It could certainly happen during the term of a Labour/Progressives/Green/Maori Party government.

  10. Greg 10

    A rise in inflation is permanent, the ‘stimulation’ from lower interest rates is temporary. You’ll end up with the same amount of economic growth with higher inflation in the long run. That doesn’t sound very intelligent to me.

  11. That’s the first time I’ve heard someone argue our interest rates are low- in fact, we usually have the righties arguing the high interest rates are all the government’s fault, now they’re arguing against them going down.

    We have high interest rates relative to the rest of the world and that’s keeping our exchange rate very high. Let the exchange rate fall and, yep, petrol will be more expensive but that will be more than made up for by increased export returns, which would stimulate the economy.

    The solution to high oil prices isn’t to keep the exchange rate high or whatever, it’s to use less petrol.

  12. “We have high interest rates relative to the rest of the world and that’s keeping our exchange rate very high”

    Exchange rate high? We have the best terms of trade since 1974 – sounds like a reason for a strong dollar. Yes our nominal interest rates are high and this will work to inflate the dollar as well – however we only have a higher “neutral interest rate” in New Zealand because our neutral interest rate is so much higher (4.5% compared to 2% in NZ).

    Why is the neutral interest rate so high at the moment – well capital accumulation has been increasing over recent years and we do import plant and machinery. Furthermore, if households believe they are currently in a “low income” state they will want to borrow to fund consumption. So we are borrowing to invest and borrowing to consume – which implies we need a higher interest rate to dampen interest rate to dampen all our borrowing.

    “Let the exchange rate fall and, yep, petrol will be more expensive but that will be more than made up for by increased export returns, which would stimulate the economy.”

    Petrol will rise immediately, exports will take 12-18 months to pick up. As a result, I don’t think the immediate impact will be that good for NZ.

    High oil prices are an issue – but they aren’t inflation. As well as high oil prices we seem to be struggling with an inflation problem – a problem that will remain as long as we keep our interest rates in easing territory 🙂

  13. Greg: “You’ll end up with the same amount of economic growth with higher inflation in the long run.”

    With GDP growth heading towards zero or below we could be looking at stagflation. As Matt has so eloquently outlined we don’t need to exacerbating the situation. by dropping interest rates. We need Allan Bollard to act decisively and raise rates by 0.25% now instead having to raise by a lot more later.

    We shouldn’t be taking economic advice from the ex-member for Tauranga.

  14. Swampy 14

    Everyone knows the biggest pressure on inflation is the huge increase in government spending, then it’s a bit rich for Labour to want to change the Reserve Bank act to allow higher inflation, this doesn’t affect Labour after all, just those rich pricks who have saved a lot of money.

  15. Everyone knows the biggest pressure on inflation is the huge increase in government spending,

    Yes – that’s why Bollard talked almost exclusively about food and fuel in his last OCR report.

  16. Sheik Sensible 16

    If Helen wants to win the 2008 election (unlikely!) she ought sack Cullen and appoint somebody else off the front row, it doesn’t really matter who, as Finance Minister. One economics illiterate for another…

    I discern that he is now perceived as worse than a “grinch” while Helen’s popularity has yet to disappear totally.

  17. Kevyn 17

    Steve you are quite right that the only way to stop the rising price of petrol from continuing to eat up our wages is to use less petrol. That’s why the weekend cottage has gone back to being a holiday home, why peak period occupancy rates have increased by up to 20% on some motorways and why country stores have seen a huge increase in trade at the expense of regional supermarkets.

    “Government can lead the way by building up public transport and rail freight infrastructure.” Why? We’ve aready got the port facilities to get more freight off more highways than any amount of investment in railways could ever achieve. Removing the legal impediments to car pooling would be an easier, cheaper and faster way to save petrol than investing in PT. The main legal impediment is that if you car pool you can’t be reimbursed for part of the petrol cost by your car pool partner(s). You need to have a taxi license to before you enter into this sort of arrangement. It’s different if you pick up a hitchhiker who offers petrol money after the journey has begun.

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