Interest rates and inflation
Two significant items of economic news came out last week. Food price inflation had risen by 5 per cent over the past year. That would have surprised nobody. Gross domestic product fell by 0.9 per cent in the June quarter, and on a per capita basis fell even more. That surprised almost everyone. Most were expecting a decline but not by that much.
While inflation and interest rates did rise over the past few years, to describe them as ‘sky-high’ and ‘soaring’ is a stretch.
While the gross domestic product fall was alarming, what has alarmed me more is the political and media response to the fall. The Minister of Finance said, “this has been a very hard-fought economic recovery after a very difficult few years of sky-high inflation and soaring interest rates”.
While inflation and interest rates did rise over the past few years, to describe them as ‘sky-high’ and ‘soaring’ is a stretch. Even more of a stretch is to think that they’re the main reasons for our poor growth performance. It is due to our abysmal productivity. The policies that need to change that rest with the Government, not the Reserve Bank.
Peter Nicholl
Red-tape and stifling regulation impose enormous costs on every business. This Government said they were going to light a bonfire under all our unnecessary or over-burdensome rules and regulations. While a few things have been done, it certainly hasn’t been a bonfire – and a bonfire is what New Zealand needs.
But the only policy response talked about in the media is the Reserve Bank cutting interest rate more aggressively. One bank economist said, “the Reserve Bank can now cut the official cash rate strongly because there is confidence that inflation will be lower later down the track”.
Really? How can anyone be confident that inflation will be lower ‘later down the track’ when food prices are rising at five per cent, rates and insurance prices are rising at over 10 per cent and we have many people leaving for Australia because wages in New Zealand are too low?
Also, the Reserve Bank has cut its cash rate more strongly than Australia, Canada, the UK and US over the past year yet gross domestic product is rising more strongly in all those countries than here. People need to start realising that lower interest rates are not going to solve any of our fundamental economic problems. It may mask them for a while but when the temporary impact of the lower interest rates wears off, our fundamental problem of poor productivity will stall our economic growth once again.
When I first started working as an economist way back in the 1970s, we had a very similar economic debate. The difference then was that the policy panacea was lowering the exchange rate. We devalued, things looked a little better for a short time, then the old problems that hadn’t been solved started impacting again, so we devalued again – and so it went on for over a decade, a decade during which New Zealand steadily slid down the global table of gross domestic product per capita.
The debate in the media since the poor gross domestic product data came out last week has taken me back to the 1970s. We look for a simple answer for a complex problem. I don’t actually object to the Reserve Bank lowering interest rates a little more. What worries me is that many people, including some of our politicians, seem to think that is all we need to do get the New Zealand economy purring along again. That is a very dangerous delusion.
Red-tape and stifling regulation impose enormous costs on every business.
