Reserve Bank: Ignoring the spike?

Date 2 August 2000
Time 7.45 am
NEWS RELEASE

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Ignoring the spike?

The Reserve Bank today warned that if the Reserve Bank is to ignore the upcoming spike in inflation when setting interest rates, then everyone else has to also.

That’s in a speech to the Electralines Business Breakfast Forum on the Kapiti Coast.

Dr Brash said many commentators were now saying that inflation was likely to be close to, or even exceed, 3 per cent for the year to December 2000, a large part of this coming from the increases in oil prices and the tax on tobacco. Under the Bank’s Policy Targets Agreement, the Bank is directed to ignore one-off changes in international prices and indirect taxation. However, he said, this depended on price setters in general doing the same.

Dr Brash said: "The Reserve Bank can ignore the impact of these one-off "shocks" to the inflation rate only if we New Zealanders do not use them as an excuse to start a more generalised and enduring increase in the inflation rate.

"If a doctor, in reviewing his or her fees, says ‘Well, the CPI went up by 3 per cent, so I had better put up my fees by 3 per cent also’, then we have a problem. If a producer of widgets sees that the CPI has increased by 3 per cent, and automatically puts his prices up too, then we have a problem. If local authorities see a 3 per cent increase in the CPI as adequate justification for them to increase rates and fees by that amount, then we have a problem. And if wages and salaries are automatically increased by 3 per cent to compensate for the increase in the CPI, then we have a problem.

"The reality is that, when the international price of oil goes up – to use the current example – we New Zealanders become poorer, and it is utterly futile to suppose that we can compensate ourselves for that fact by giving ourselves higher incomes. To the extent that some New Zealanders succeed in winning such compensation, the gain is achieved at the expense of other New Zealanders, since in aggregate we are all worse off.

"Most important of all, the Bank’s ability to ignore the "spike" in inflation which seems likely to lie ahead of us depends crucially on the willingness of New Zealanders themselves to ignore that spike in negotiating increases in their own incomes. If they do not, there can not be the slightest doubt that monetary policy will need to be tighter than would otherwise be the case," Dr Brash concluded.

For further information contact
Paul Jackman, Corporate Affairs Manager
Ph 04 471 3671, 021 497 418, home 04 938 8177, Jackmanp@rbnz.govt.nz

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