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Reserve Bank has head in sand about oil prices

8 June 2006

Reserve Bank has head in sand about oil prices

The Reserve Bank based today's official cash rate statement on highly questionable assumptions about oil prices, and the subsequent impact on the inflation outlook, Green Party Co-Leader Jeanette Fitzsimons says.

"We cannot afford to base our economic planning, as the Bank says it does, on the assumption that the Dubai oil price (which the Bank claims to be the one most relevant to the New Zealand economy) will ease back to $45 a barrel by 2008.

"This rosy premise explains why the Bank goes on to describe the recent rise in oil prices as a 'one off' or 'spike' when assessing its likely effects on inflation.

"Let's get real. The hike in oil prices is not some temporary blip to be endured before we resume business as usual. Oil price inflation is here to stay. The Bank should be factoring in the end of cheap oil, not to mention the supply uncertainties to do in future with Iran.

"These realities make it far more likely that oil prices will have a serious, lasting impact on the inflation rate, and we need to be planning accordingly," Ms Fitzsimons says.

"That does not mean raising the OCR. The Bank doesn't have the tools to reduce our oil dependence, and hiking up everyone's mortgages isn't going to help people to adapt.

"The crucial policy response has to come from Government, which needs to be taking serious, immediate action on cutting our oil dependency - by setting standards for more fuel efficient cars, investing in the rail system and more public transport instead of new motorways, and speeding up the production of biofuels.

"What the key advisory bodies can usefully do is get their act together on oil prices. The Reserve Bank plainly believes in its $45 a barrel Dubai projections, and has based its cash rate actions on them.

"Treasury though, based its Budget figures on the assumption that oil prices will hit $68 a barrel by September 2007 (it was already $73 by the time the budget was read) and stay there for the foreseeable future. The Ministry of Economic Development has a different figure again.

"What they share is a common denial of oil price realities. Both they, and the Government need to prepare to reduce oil price inflation by reducing the amount we need to import."


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