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Interest rate rises precipitate, penny pinching

Media Release Employers and Manufacturers Association

Raising interest rates next week to quell supposed inflationary pressures is like taking a scrooge approach from yesterday to deal to the Bill Gates economy of today and tomorrow, says Alasdair Thompson, Chief Executive of the Employers and Manufacturers Association.

“Hiking the price of borrowing to tighten the money supply on its own just won’t cut the mustard for today’s new economy,” Mr Thompson said.

“There are as many indicators why inflation will not go up over the next year as there are saying it will.

“Based on its past performance, our Reserve Bank will react only to the numbers suggesting upward price pressures, not to the signals pointing at lower future costs and prices.

“No doubt the Bank will argue that private sector debt and New Zealand’s current account deficit will shortly affect our credit rating and raise interest costs anyway. It will also be trying to stop our exchange rate falling any further, to stem the imaginary higher costs from imports.

“Irrespective of the lower exchange rate, prices of many imports have fallen. Major examples are the low prices of the imports flooding in from Asia, which also check price rises on other goods.

“Our own figures suggesting New Zealand industries are nearing full capacity utilisation are being interpreted to mean higher wage demands will result. Equally we know many businesses settling their wage rises at two and a half per cent or less for the next two years.

“The new Government’s programme for change is also causing the Bank Governor to err on the side of caution. Again, many of the policy changes in the pipe line will constrain inflation as much as increase it.

“For example, significant tariff cuts this year especially on apparel and footwear, and the reviews of telecommunications and electricity will hold back overall consumer price rises, though ACC premiums, minimum wage increases and employment law changes will eventually boost employment costs.

“Maintaining the Government surplus with increased taxation and the cancellation of the previous government’s tax cuts will also help control inflationary pressure as a balance against the spending increases foreshadowed for health and education.

“Interest rate increases will counteract desperately needed investment-led growth, of the sort that would help recover our current account shortfall.

“Nevertheless we accept the Reserve Bank Governor will raise interest rates next week. In view of this we urge him to telegraph a very gradual tightening of monetary conditions with a target of six per cent for the official interest rate indicated by the year’s end.”

Further comment: Alasdair Thompson tel 09 367 0911 (bus)

© Scoop Media

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