The Reserve Bank has left the Official Cash Rate unchanged; no-one expected a rate cut this early.
It’s encouraging that Bollard has firmly signalled that interest rates will be coming down this year despite projected inflation reaching 4.7% in the September Quarter. There’s no use in the Reserve Bank strangling our economy with high interest rates when the inflation we are experiencing is coming from offshore in the form of high international prices for oil, food, dairy, and metals (underlying all of this, of course, is peak oil). In signalling rates will come down despite the inflation figure, Bollard is moving the Resave Bank away from a myopic, useless fixation on inflation and taking the overall interests of the economy and growth into account. After all, that’s what Australia does and they’re getting on just fine despite having 4.4% inflation.
No doubt, National and its allies will claim that Labour’s tax cuts were too large and prevented a rates cut but remember the Reserve Bank was expecting tax cuts of $1.5 billion this year, that amount has been in its model for a year, and that’s exactly what the Government has spent, so the government has hardly shocked the RB into not lowering rates. There was never going to be a rate cut this early.
So, no interest cut this time but a cut later this year. Politically, that’s going to be good for the Government tax cuts, higher Working for Families payments, lower mortgage payments, and higher benefit payments(?) all coming on-line before the election. But, more importantly, it’s good for the economy that the Reserve Bank is taking a realistic approach to international inflation and is prepared to lay off fighting inflation for the overall health of the economy.