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Be Careful, Minister!

23 August 2002

Be Careful, Minister!

"Michael Cullen must be extremely careful what signals he sends to both financial markets and the public when he negotiates the new Policy Targets Agreement with the Governor-designate of the Reserve Bank," says National's Finance spokesman Don Brash.

"During the campaign, Dr Cullen created the impression that there would be no change to the inflation target after the election. Now he is implying that while there will be no change to the top of the target, he intends to raise the floor of the target.

"At the same time, he is trying to suggest that he does not want higher average inflation. I would certainly hope not, since there is no evidence that higher inflation would enable New Zealand to grow faster on a sustainable basis.

"Dr Cullen must avoid even the perception of being more tolerant of inflation because of the adverse impact this would have on long term interest rates."

Dr Brash says that during the past decade, inflation has averaged about 2 per cent and over the last three years 2.5 per cent, a rate of inflation very similar to that in Australia over the same period (after the effects of their GST are stripped out).

"It is certainly hard to see any reason why the Finance Minister should be asking the Reserve Bank to be even more relaxed about inflation.

"Dr Cullen has suggested he wants the Bank to operate monetary policy in a more flexible way. But by doing this, he is ignoring the conclusions of his own expert reviewer Professor Lars Svensson. Last year, Svensson concluded that: 'the Reserve Bank's current conduct of monetary policy is entirely consistent with the best international practice of flexible inflation targeting, with a medium-term inflation target that avoids unnecessary variability in output, interest rates, and the exchange rate.'

"After the Svensson Review, Dr Cullen, sensibly, sought a multi-party consensus on its conclusions. Now that the election is over, he should stop playing political games with the monetary policy framework and again seek a multi-party consensus on that framework.

"As Svensson also recommended, there is considerable merit in avoiding a situation where something as fundamental as New Zealand's attitude to inflation is subject to change after each election. I, for one, would be a willing party to a sensible political consensus on the inflation target, which has some prospect of enduring," Dr Brash concluded.

Ends

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