19 January 2000

Cullen to question forecasts

Finance Minister Michael Cullen will be raising with the Reserve Bank and Treasury the Government’s concern at the inaccuracy of their inflation forecasts.

The Consumer Price Index for the December quarter showed an increase of just 0.2 percent. This was well below the Treasurys 0.8 percent forecast and the Reserve Banks forecast of 0.9 percent.

Clearly the Reserve Banks higher inflation expectation influenced its decision today to raise the OCR by 25 points to 5.25, Dr Cullen said.

He would also be discussing with the bank the relationship between the timing of RB statements and Statistics New Zealand releases.

On the face of it, it seems a little strange that the banks statement should come out less than two hours before the official statistics on inflation were released.

The December result puts the annual inflation rate at 1.3 percent which is below the mid-point of the Reserve Banks price stability target, Dr Cullen said.

I recognise that the bank needs to anticipate future inflation rather than just responding to past inflation and that there is obviously a judgement to be made about the strength of future inflationary pressures.

And I accept absolutely that it is the bank which must make that judgement.

However I would expect the Reserve Bank to monitor developments very carefully over the next few months and not necessarily assume inflationary pressures are there when the published figures are showing that they are not.

The international experience was that modern economies tended to deliver lower inflation problems.

Dr Cullen said a number of the Governments policies should also have the effect of reducing the inflation risk, particularly the repeal of the previous Governments planned tax cut and the introduction of a new 39c income tax step on incomes over $60,000.

ENDS

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