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Reserve Bank doesn’t believe its own forecasts

Reserve Bank doesn’t believe its own forecasts

The Reserve Bank has forgotten that monetary policy should be set by looking ahead to what will happen in the economy in 12–18 months time, believes Infometrics Senior Economist Gareth Kiernan. He says that the Bank has instead chosen to focus on the past, using historical data as the basis for today’s decision to keep the Official Cash Rate at 5.75%.

The Bank’s latest forecasts appear to provide grounds for a cut in interest rates. They predict that inflation will be comfortably under control over the next year (around 2% per annum) and that GDP growth will be slower than the New Zealand economy’s potential.

Mr Kiernan believes that the Bank lacks the courage of its convictions to cut interest rates. “The rapid rise in the New Zealand dollar is cramping activity in the export sector, and will limit inflation over the next year,” he says. “But the Bank’s attitude is that it needs to see hard evidence of a slowdown before it will ease monetary policy. By taking that approach, the Bank risks exacerbating the predicted weakening in economic growth over the next year.”

Worsening the economic slowdown would conflict with the Policy Targets Agreement between the Reserve Bank and the government. The Agreement states that the Bank “shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.”

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