The economy is clearly slowing. Fundamentally, it remains strong with high employment, good wages rises, and strong prices for our exports but employment and retail spending both declined in the first quarter of this year, the housing market is flat, and there is a danger that if the Reserve Bank keeps its foot on our economy’s throat much longer it will pass out into a shallow recession.
The markets are already expecting the official interest rate to start dropping; banks are dropping their fixed-term mortgage rates and price of the New Zealand dollar is falling (it’s an under-acknowledged fact that the point of moving up interest rates is mostly to move up the currency, so as to cool the economy to bring down inflation by choking exports and flooding local production with cheap imports). Lower interest rates will allow the economy to spring back into growth by reviving commercial borrowing for investment and letting the dollar drop further, so we get a better price for our exports and aren’t undercut at home by imports.
Reserve Bank Governor Alan Bollard is right to worry that this would entail more inflationary pressure (a lower dollar means oil imports are more expensive and we get more money into the economy for the same amount of export production plus employment and spending would recover) but it’s time to realise that most of the inflationary pressure New Zealand is facing is beyond his control. Oil and food are international commodities; their prices are going up everywhere and there is nothing that the Reserve Bank in little old New Zealand can do about it. There’s no point choking our economy over international inflation; it makes us poorer and does not get rid of the inflation.
So, Mr Bollard, it’s time to bring that rate down. Accept that international conditions mean inflation is going to remain robust and that is no reason to prevent New Zealand from growing.