RESERVE BANK SHOULD QUIT WHILE IT’S AHEAD
Mark Lister, 26 September 2016
I’m starting to think that the Reserve Bank should just quit while they’re ahead.
Leave the official cash rate (OCR) where it is, and don’t bother cutting it any lower.
Interest rates are a tool to help keep an economy running at the correct pace, not too fast and not too slow.
When things start to look overheated, crank them up to increase borrowing costs, discourage spending and slow things down a little.
When things are looking shaky, reduce them to boost investment, spending and hiring.
So that begs the question, when an economy is going as well as ours, why on earth would we want a record low OCR, let alone to cut it even further into emergency territory?
Our growth rate is 3.6 per cent, higher than just about anywhere else in the developed world, and the best we’ve posted since 2014.
Yes, population growth has been a big contributor, but even on a per capita basis, we’re still ahead of the US, Europe and Japan.
Unemployment is low at around 5 per cent, house prices are rising, while tourism and construction are booming.
Dairy has been the only weak link, but now we’ve seen prices rebound more than 30 per cent in two months, pushing the Fonterra payout above breakeven for the first time in three years.
The high NZ dollar is the only real reason to cut interest rates, but the Reserve Bank might well be fighting a losing battle there.
Our high currency is simply a reflection of our better growth prospects and stronger economy.
Even if the OCR was 1.5 per cent, it would still be head and shoulders above those in the US, UK, Europe and Japan.
Besides, what’s so wrong with a strong currency anyway? There are arguably more New Zealanders that benefit from it being high than from it collapsing.
Consumers, travellers and importers are all better off under a high dollar. It keeps a lid on petrol prices and transport costs, which helps even the poorest parts of society.
The export sector would obviously be happier if the currency was lower, but plenty of exporters are doing just fine at the moment.
Just about all of the listed exporters are in the best shape they’ve ever been and posting record profits, while key manufacturing indicators have signalled expansion for 19 consecutive months.
Maybe export success is more to do with having efficient, sustainable business models than where the currency is at.
Inflation is much lower than the Reserve Bank would like, but that’s only because cheaper imports are dragging it down.
Non-tradable inflation (the kind we don’t import) has averaged around two per cent over the last couple of years.
The basket doesn’t seem to reflect reality anyway, with “unavoidable” inflation (like rates, insurance, rent and electricity) showing no signs of weakness.
The economy is fine and doesn’t need more stimulus, while further OCR cuts might only have a minimal impact on the dollar.
Maybe all we’re doing is pouring further unnecessary fuel on our housing bubble, and leaving ourselves with even less options up our sleeve for when we really do need it.
This article was originally published in The New Zealand Herald on Sunday 25 September 2016.