Close to zero inflation – Reserve Bank must lower interest rate

“With price rises at just 0.1 percent over the last year, the Reserve Bank must reduce its Official Cash Rate next week. It is well past time it did so,” says CTU Economist Bill Rosenberg.

“A housing price bubble is forming in Auckland – but only Auckland. That cannot be dealt with the interest rate that the Reserve Bank controls. It needs to find other tools such as stopping property investors from further inflating prices. The Government is also failing in its responsibility to treat the situation with urgency by attacking land banking and building affordable good quality houses itself, either for rent or resale. It also needs to consider immigration settings for their effect on both raising house prices and keeping wage rises low and a fair tax regime on investment property,” Rosenberg said.

“Despite the Reserve Bank holding its official cash rate at 3.5% since June last year, the retail banks are competing down mortgage interest rates so the Reserve Bank is not succeeding in hold lending rates up to calm house prices and is instead creating huge costs on the export sector of the economy. Real interest rates (taking account of expected very low inflation) are moving back to their late 2008 levels and higher than they were through most of the earlier 2000s. These are costs for business as well as for home owners. The Reserve Bank Board needs to be challenged to do its job of encouraging more innovative policy or be replaced by a group with more courage.”

“Instead it is helping to raise the value of the New Zealand dollar against most currencies, especially the Australian dollar. The high exchange rate with the Australian dollar is much more a reflection of the interest rate differential with Australia than the relative health of our economies. The Australian equivalent of the OCR is a full 1.25 percentage points lower than New Zealand at 2.25 percent. That’s great encouragement for dealers to make money on the difference, pushing up the exchange rate. There’s an even bigger difference with Europe, Japan and the US,” he said. “While the US dollar exchange rate has fallen from its highs of well over 80 cents, over the whole basket of currencies New Zealand’s exporters face, the exchange rate is still much too high, and especially against our most important manufacturing export market, Australia.”

Rosenberg also noted that price rises were being driven largely by housing, electricity and increased excise duties on cigarettes and tobacco. These rises were countered by falls in petrol prices of 15 percent over the year.

Housing costs rose steeply, with rents up 2.3 percent over the year and purchase of new housing up 5.0 percent, and this does not include the rising costs of buying an existing house. Electricity prices rose much faster than CPI at 3.6 percent over the year. Food prices rose 1.2 percent.

ENDS

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