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Reserve Bank Should Challenge Govt Spending

25 October 2005

Case is building for Reserve Bank to challenge Government spending…

Michael Barnett, Auckland Chamber of Commerce CEO said that while it looks likely that the Reserve Bank will tighten interest rates later this week, it should not be accepted as inevitable.

“The prime factors that have pushed inflation above the Reserve Bank’s 3 percent benchmark are higher petrol prices and increased government spending across a number of fronts.”

Government has promised increased spending on everything from student loans, holiday pay, minimum wage, and superannuation. Also not helping to keep inflation in check are the increased costs of complying with government regulations and actions by local authorities to put up rates – there are very few who haven’t lifted rates by less than 5 percent.

“While it is understandable that the Reserve Bank - whose sole job is to keep inflation within a 1-to-3 percent guideline – might be keen to tighten interest rates when it makes the call on Thursday, the medicine might be easier to take if it sharpened its call on Government to reign in its expenditure,” said Mr Barnett.

“With some signs that international petrol price rises may be easing and a government commitment to keep its own expenditure in check, a rise in interest rates should not be taken for granted.”

Not helping the case for business to improve productivity and lift earnings is that New Zealand’s interest rates are already among the highest in the developed world.

“It is a hugely blunt instrument and contradictory that on one side the Reserve Bank has little choice to keep inflation in check other than to hit business with higher interest rates, while at the same time government is urging business to do more to increase growth and export earnings.”

ENDS

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