Interest Rate Talk Fuels Inflationary Expectations

Speculating over how soon the Reserve Bank will hike interest rates is tantamount to pushing up inflationary expectations, the Employers & Manufacturers Association (Northern) says.

"Speculation on what the next move of the Reserve Bank is likely to be is proving a substitute for analysing whether any real threat of inflation exists," said Alasdair Thompson, EMA's chief executive. "On balance, there isn't.

"But the financial institutions want to know whether the Reserve Bank thinks there is, and respond to that, regardless of whether a different interpretation may be more valid.

"Dr Brash has a record of lowering interest rates too little too late on the way down, and too much too soon on the way up. This year business is concerned Dr Brash will again be too hasty.

"In our highly competitive economy, Dr Brash does not adequately factor in the principle that when the economy is growing, volume throughput can increase while unit costs reduce. This lowers inflation.

"All the signs in our economy point toward this type of scenario. Though employment is reasonably strong, salary and wage pressures overall are within the bounds of the inflation target.

"Accommodation costs may be creeping up but are being offset by falling commodity prices. Plenty of spare production capacity is available.

"We see no reason for talk of increasing interest rates; in fact a better case could be made for cutting them further, to Australia's level."

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