A Rise Too Far

Thursday 28 Oct 2004

Richard Prebble, Finance Spokesman

ACT's Finance spokesman, Hon Richard Prebble, said that the Reserve Bank's interest rate rise was a rise too far.

"If the Reserve Bank's decision to increase interest rates is correct, it would mean that the Australian, British, European and US Federal Reserve Banks are all wrong and only New Zealand is in step. The New Zealand Reserve Bank is the only bank in the western world to have increased interest rates six times this year to give this country the highest interest rates in the Western world.

"I know of no economic data that would indicate New Zealand inflationary pressures are uniquely strong. The suggestion that New Zealand, as a small economy, is somehow more vulnerable to inflation is nonsense. There is now a real danger that next year's slowdown will be harsh and damaging.

I believe that the Bank is ignoring its own data that indicates interest rate rises affect the economy for the next 18 months and possibly two years. It is correct that the use of fixed rate mortgages has ameliorated the effect of the five previous interest rate rises but this is only a matter of timing. Every week, fixed rate loans expire and are replaced by higher interest rates. The Bank didn't need to do anything for this effect to go on impacting the economy for the next two years.

"There is data to indicate that the willingness of the New Zealand Reserve Bank to intervene on interest rates is having long term damaging effects on the economy. Overseas commentators have pointed out that New Zealand business investment in productivity-improving capital items is running at 50 percent of Australia's, and some commentators have suggested this investment gap is the reason for Australia's better economic performance. The Reserve Bank itself uses as a justification for the interest rate rise the fact that New Zealand firms are running at capacity. What one would expect is that firms would be heavily investing in new machinery to give greater capacity but this is not happening.

"The reason is no mystery. New Zealand businesses know that just as they invest the Reserve Bank will arbitrarily increase interest rates leaving them with spare capacity and debt to be serviced at the highest interest rates in the Western world.

In contrast the Australian Reserve Bank has adopted a much more moderate policy which has resulted in a climate where business is prepared to invest, and the extra productivity has not only resulted in more prosperity, but superior goods at cheaper prices; the best answer to inflationary pressure.

ENDS

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