Deflation spectre portends cut to OCR needed

edia statement Friday, January 18, 2013

Deflation spectre portends cut to OCR needed

In light of the latest CPI result today the Reserve Bank should review how it assesses inflation and cut the official cash rate, the Employers and Manufacturers Association says.

"With inflation below the Reserve Bank's mandated target for three consecutive quarters now the official cash rate should be cut, said Kim Campbell, EMA's chief executive.

"Lowering the OCR makes sense for three important reasons:

1) It would help keep us in line with interest rate cuts in Australia, our largest trading partner, thereby maintaining the trans-Tasman cross rate at its present favourable level. Further falls in the Australian dollar could well stifle our exports to Australia and short circuit our fragile recovery.

2) It should keep us within the central bank's mandated target range for inflation by holding CPI prices between one and three per cent over the medium term.

3) It would make investment in productive enterprise more attractive; interest costs are a hand brake on investment.

"If we're lucky it might also help bring our exchange rate down marginally.

"The Reserve Bank needs to separate out the price inflation in Auckland's housing market from the deflation elsewhere in the economy. For example the Producers Price Index has been negative for many months, and Auckland's house prices are driven by insufficient stock due to few new houses being built over recent years.

"No adjustment to interest rates will make any difference to the present lack of housing.

"If housing affordability is an issue, that's hardly the responsibility of the Reserve Bank and we fail to see why the productive sector should be punished for a lack of housing stock.

"Some groups advocate a change to the Reserve Bank Act. That's unnecessary. All the Bank has to do is stick to its own rules."

ENDS

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