http://www.interest.co.nz
Inflation is a problem that cannot be brushed aside amid the clamour for interest rate cuts. The Reserve Bank of New Zealand is under pressure right now from a wide range of business leaders and commentators who want it to cut the official cash rate from 8.25% to give the economy a boost.
Here's why an early cut would be dangerous.
Firstly, we have an inflation problem that is persistent and is generated largely from domestic sources. It cannot afford to go unchecked. This is not just inflation from higher oil and food prices. It is widespread throughout the economy and comes from increased inflation expectations, strong wages growth and endemic increases in government charges, fees and taxes at both local and central government level.
These problems are not going away in a hurry. The introduction of an emissions trading scheme will add several rounds of fresh inflation in the next couple of years and likely tax cuts from whoever wins the next election are likely to increase inflationary pressures as well. Our low unemployment rate is not going away in a hurry and wages pressure will remain.
Secondly, an early cut in rates could actually accelerate these inflationary pressures. Bollard has to be exceptionally careful at the moment because any hint of a rate cut soon is likely to unleash a wave of New Zealand dollar selling. That's because our currency is supported by carry traders who are in New Zealand dollars simply because our interest rate differential is so wide.
They are not holding New Zealand dollars because they like our long term growth prospects. This is hot money that has, ironically, helped keep inflation from completely blowing out by pushing the New Zealand dollar skywards over the last two years.
So if the New Zealand dollar fell fast, this could make inflation even worse. The currency is likely to fall anyway as our economy slows and the market anticipates a cut, but the more hawkish Bollard sounds, the slower the currency will fall.
So why are people baying for an interest rate cut? NZX Chief Executive Mark Weldon has called for a cut, as has Real Estate Institute President Murray Cleland. Exporters have been calling for cuts for some time, although they have borne the brunt of the high currency for such a long time so such calls can be excused.
People in debt to their eyeballs will no doubt also like a cut in interest rates. The first and most obvious reason is that lower officially interest rates will eventually reduce their monthly mortgage payments, although the connection is not nearly as direct as it used to be because so many of our mortgages are fixed rate mortgages funded from wholesale markets.
The second less obvious motivator is that an early cut and the prospect of an inflationary spike is good news for those with big debts. Inflation erodes the value of savings, but inflation plus high nominal wage growth quickly erodes the burden of debt. After all, why pay it back when all you have to do is wait a while and it will just fade away.
New Zealand's household debt has jumped from under NZ$69 billion in 1999 to almost NZ$160 billion now. That works out at the average household doubling their debt to around NZ$100,000 each inside a decade. No wonder the prospect of high inflation is appealing to an indebted nation.
This is, of course, disastrous thinking that would let the demon of inflation back in the door. There is a whole generation who have grown up without inflation and perhaps take for granted that it will either not come back or isn't too much of a problem.
It is a problem and we should fight to stop it returning. Hold your ground Alan
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Consumer price inflation up to 3.4%by ofInterestNZ691 views
la(dot)org . au
Mate, check out our site.. Launching soon. A home for Liberty - Australia.. Austrian economics, its going to be a big tent for the Australian Liberty movement - civil libs, economic liberty etc. etc. We need to kick this nannystate in the arse. :)
Conza88 3 years ago
Oh yeah, we are in the real matrix and we have taken the red pill, even this silly guy from NZ has no idea.
hqlion 3 years ago
Spot on. Spot on. The Creature from Jekyll Island.
Conza88 3 years ago
The Reserve banks of this world (but mainly the US)are causing the inflation by increasing the money supplies. You can play with rates which has an effect, but money supply is the cause.The keynesians are wrong and the austrians economists are right.
hqlion 3 years ago