Helen Clark and John Key were in agreement, when September-quarter CPI figures showed annual inflation had risen 5.1%. It was the biggest rise in 18 years, lifting inflation significantly above the official 1-3% target range. It hadn’t been above 5% since reaching 7.6% in 1990 after GST was hoisted from 10% to 12.5%. But neither party leader doubted the latest data would or should dissuade RBNZ Governor Alan Bollard from lowering the official cash rate today. They and a raft of commentators expect inflation to ease from here, even though they are wooing voters with plans to rejuvenate our flagging economy with differing mixes of tax cuts and Govt spending.

Inflation Not Relevant. Not so long ago they would be accusing each other of fuelling inflation with the fiscal stimulants they are peddling. They are right not to fret unduly about inflation. Much of the latest CPI rise came from overseas (surging oil prices) or forces beyond official control, such as drought (food prices). And we are far from suffering from the double-digit inflation which pushed mortgage rates above 20% in the 1980s – for 20 years in the 1970s and 80s NZ inflation rates averaged 11.6% annually, well above the 7% developed world average. Stiff medicine – the Reserve Bank Act and its monetary policy management framework – was prescribed. It worked.

Time For A New Direction? Since 1990, our inflation rate has averaged a tad above 2% a year; the developed world’s average has been around 2.3%, although the latest CPI figures edge us ahead of the OECD’s 4.7% average in the year to August. This raises a good question: does our economy still need the stiff medicine prescribed 20 years ago? NZ First’s Winston Peters is calling for a rewrite of the Act, arguing that “exorbitant interest rates” are destroying small businesses and threatening home ownership. Alas, he also promotes potty ideas about floating Kiwibank shares, discouraging foreign ownership of NZ assets and deterring foreign workers.

OCR Not Working. But it’s no bad thing to think about the export-squelching consequences of hoisting the OCR to deal with forces it can’t affect, such as oil prices and drought. It’s worth questioning too (as BERL economists have done) whether NZ’s recession results from sub-prime upheaval or from the RBNZ’s raising the OCR since early 2004 to slow the economy (as it explained) “to keep medium-term inflation under control”. The timing was just too bad, eh?

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