Gareth Morgan, Director of Gareth Morgan Investments
To the extent that the agreement between the government, the CTU, and the RBNZ delivers lower inflation, then NZ is closer to the day when the risk premium accorded our interest rates by the international capital market, can drop.
To the extent that the Reserve Bank accommodates a precipitous fall in interest rates on the back of an agreement that fails to deliver, we can expect yet more repetition of the RBNZ having to jack short rates back up to make up for previous miscalculation.
To the extent that the productivity agreements that are negotiated deliver wage rises without true productivity improvements, the impact of the agreement upon unit labour costs and inflation will be diluted.
To the extent that the new National government believes there is a legitimate tradeoff between growth and inflation, then we are likely to quickly discover that the impact of last week’s agreement on financial market pricing is overtaken by that government’s enthusiasm to pursue growth via lax monetary policy.
To the extent that National is unable to accept that Labour have departed government deliberately leaving their successors a fiscal blowout that requires intensified efforts to either cull expenditures, and/or raise taxes, then the implied rise in debt financing will generate interest rate pressures that outweigh the benefits of lower inflation.
For all the ifs and buts outlined above, the agreement last week can be seen as a positive development. But if, as is their tendency, the markets regard it as a home run before the batting has even begun, then their expectations deserve to be punished. In a political environment that is increasingly stressed, with chasms opening between the alternate pretenders to the throne of National’s economic policy, it is ambitious to depend on a last hour contribution from Labour as providing a meaningful antidote to rising inflation. National yearns for drastically lower nominal interest rates. The barely disguised political backbiting between their senior members can only intensify once the election is passed, and portends a lunge for growth not long after.
The ambition of Mr Bolger to occupy the No Mans Land between his warring wet and dry factions, is testimony to the fine balance of National’s numbers. No leader of National it seems would last for long aligning to either the Peters or Richardson faction. A government so evenly divided must quickly fall prey to the lobby of vested interests as activity weakens.