For the business pages, it’s Reserve Bank week and once again the banks want the Governor to push up the price of money, while those in the real economy where the jobs are want interest rates kept steady. As they say, there are no signs of rampant inflation and growth forecasts are uncertain.
But the money markets want a one-way bet. And some of them were not subtle:
Darren Gibbs at Deutsche Bank said it was “virtually unthinkable” that the Reserve Bank would keep interest on hold.Roland Randall at TD Securities said such a move would be seen by the markets as the Reserve Bank “failing its first test of faith” which could prompt a selloff of the New Zealand dollar by currency traders.
On the other hand:
Some sectors of the economy have called for interest rates to be kept on hold until there is evidence of a broad-based recovery.
The New Zealand Manufacturers and Exporters Association said last month’s rate hike was based on an optimistic reading of economic conditions and that another interest rate increase could damage the recovery. Chief executive John Walley said the recovery was, at best “weak and unbalanced”.
“A dip back into recession in Europe or stagnation in China could see commodity prices fall further and very quickly,” Mr Walley said.
“The risks posed today by these potential shocks far outweigh any potential inflationary pressures a year or so down the track.”
And the old inflation bogey gets trotted out again.
Khoon Goh, senior markets economist at ANZ/National, said in Wellington last week that keeping interest rates down would stimulate the economy, but rather than increase productivity it would drive up consumption, fuelling another housing bubble.
“What the historical experience has shown is that if you keep interest rates too low for too long, yes it stimulates the economy, but it stimulates the wrong part of the economy.”
The twenty-first century risk is deflation, not inflation. If interest rates are kept too high for too long it also stimulates the wrong part of the economy – the financial sector. Holding rates in check this month is not going to start a housing bubble, but it may save jobs in manufacturing.