Gareth Morgan, Director of Gareth Morgan Investments
Friday’s move by the RB to haul back a little on the easing monetary conditions was overdue. While the threat of immediate inflation may well be minor, as various sector interests have been eager to point out, NZ is threatened, along with other oil importers, by a sharp and substantial rise in the price of oil should hostilities escalate in the Middle East. In true anti-inflationary style we should therefore be prepared for that outcome, with monetary policy settings in place to minimise the second round effects of such a shock. Monetary policy in both Japan and Germany has taken this approach over recent months
Too often in the past monetary policy has not been attended to in time to head off the detrimental inflationary impact of these types of shocks, with the result that NZ, along with Australia, Britain and the US has adopted a policy delinquency that has facilitated the spread of inflation, undermining the economic viability of our internationally competing industries. If NZ is going to break free of this policy dereliction it has to adopt pre-emptive anti-inflationary policies. Despite the fact that the economy is clearly in a substantial recession and there are further significant downturns predicted for rural incomes this year, the potential quantum leap in the price of oil also has to be tackled responsibly. Ignoring it, and allowing its effects to multiply through domestic price and wage levels would show incompetence. A rise in the price of oil means a cut in the real incomes of oil importing nations. To exacerbate that effect by allowing oil price-induced domestic inflationary effects, can only worsen the result.
The RB has maintained call rates at below 12% for the last month and has overseen a 3% fall in bill rates over the last three months. All this has occurred against a backdrop of a currency that has fallen by 5%. Such an outcome belittles both the claim from some quarters that the RB is using the nominal exchange rate as a target, as opposed to one item on the checklist of indicators of monetary policy; and the claim that the RB is preventing interest rates from falling. Over the last few months RB policy has been specifically directed at accommodating an easing of short term interest rates. But to pursue this policy to the point that the over-indebted want, would lay NZ open to the ravages of oil price-induced inflation and thrust the country into a long period of stagflation as happened in the 1970’s. Such policy expediency would be tragic given the efforts made over the last six years to eradicate inflation.
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