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Reserve Bank Missed Opportunities For Lower Interest Rates

Reserve Bank Missed Opportunities For Lower Interest Rates

New information released by the Green Party today shows that the Reserve Bank has been over-estimating the rate of inflation meaning interest rates have been kept higher than necessary.

Reserve Bank board papers released to the Green Party under the Official Information Act show that since 2011, the Reserve Bank has consistently assumed inflation would remain around the mid-point of its target band yet actual inflation has been lower meaning the Bank had additional scope to cut the Official Cash Rate (OCR).

“Poor forecasting by the Reserve Bank has meant interest rates have been kept higher over the last year than they needed to be,” said Green Party Co-leader Dr Russel Norman.

“Higher interest rates have slowed our economic recovery and kept our dollar higher, hindering economic rebalancing towards exports and import substitution.

“The Bank’s singular focus on managing inflation comes with a heavy opportunity cost for the rest of the New Zealand economy – less jobs and more debt.”

The Reserve Bank paper highlighted the fact that the New Zealand dollar was overvalued and needed to come down to ‘stabilise our foreign debt position’.

“By keeping the OCR higher than it needed to be to manage actual inflation, the Reserve Bank Governor has kept the dollar higher hurting exporters and export-led growth,” Dr Norman said.

“This again highlights the problem of leaving the OCR decision to one person only – the Reserve Bank Governor,” said Dr Norman.

“No other country in the OECD leaves such an important decision to one person.

“Treasury agree and have recommended a review of the single decision-maker feature, a review the Minister of Finance has refused without reason.

“Having the Reserve Bank Board setting the OCR leads to better more balanced decision making, as the interests of the wider New Zealand economy will be better represented around the table.”

Dr Norman commended the Reserve Bank for implementing new measures to improve their inflation forecasting going forward.

Reserve Bank graph comparing actual inflation against forecast:

Link to Reserve Bank board paper on bank inflation forecasting:
https://www.greens.org.nz/sites/default/files/reserve_bank_board_paper_on_inflation_forecasting.pdf  

ENDS

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