29 July 2015

Reserve Bank’s failings hurting businesses and households

New information released by the Green Party today shows that the Reserve Bank has failed to forecast inflation accurately over the last four years meaning interest rates have been kept higher than necessary, hurting businesses and households.

Analysis by the Parliamentary Library of Reserve Bank inflation forecasting versus the actual inflation rate shows that the Bank has consistently mis-forecast inflation over the last four years, resulting in a higher Official Cash Rate (OCR) than necessary to control inflation. Higher cash rates lead to higher home mortgage rates and borrowing costs for businesses.

“Poor inflation forecasting by the Reserve Bank has meant interest rates have been kept higher over the last four years than they’ve needed to be,” said Green Party Co-leader James Shaw.

“Higher interest rates hurt economic activity as businesses face higher borrowing costs, hurting job creation in the economy. They also raise the cost of mortgages for home owners.

“Higher interest rates also hurt jobs. According to the Reserve Bank’s own numbers, a one percent rise in the OCR reduces economic output by 0.5 - 1 percent and increases unemployment by 0.5 - 1.2 percent.

Last week, Tony Alexander, Chief Economist at the Bank of New Zealand, criticised the Bank’s inflation management saying, ‘The Reserve Bank is well away from doing its job of keeping inflation between 1 percent and 3 percent over the business cycle.’

“Here’s further evidence of a need to revisit the Reserve Bank’s governance structure,” said Mr Shaw.

“Our current structure relies too heavily on the judgement of one person to set interest rates – the Reserve Bank Governor. No other country in the OECD gives full responsibility for the OCR decision to just one person.

“The Treasury has previously recommended a review of our single decision-maker feature; a review the Minister of Finance has refused without reason.

“It’s time for Bill English to reverse his position and review the Bank’s decision-making structures given the impact OCR decisions have directly on our economy.”
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