Hold Down Inflation, Or Choke Recovery?
May 10th, 2010
NZ’s economic recovery remains fragile, despite the commodity export boom (the ANZ says its NZD Commodity Price Index hit a new record high in April, with ten of the 13 commodities monitored rising during the month). As shown in the Crown’s financial accounts, corporate tax revenue is well below forecast, reflecting in particular how the small and medium business sector (at the heart of the NZ economy) is struggling for viability in current trading conditions. It poses a dilemma for the Reserve Bank: should it raise the OCR to damp down inflationary pressures from the surge in commodity prices, or should it hold back in case it chokes off recovery? Aust’s Reserve Bank this week raised its official rate again, which now stands at 4.5%, compared with NZ’s 2.5%. The RBNZ has confirmed it expects to begin removing policy stimulus over the coming months, “providing the economy continues to evolve as projected.” But it is unlikely to be as aggressive as its Aust counterpart. There is plenty of evidence the margin trading banks are operating above the OCR underlines they are keeping a tight hold on lending (and in effect doing the work of the RBNZ).
The other side of the coin is inflation is likely to hit 5% as a result of the ETS, the tobacco excise, and a probable GST increase. Though the RBNZ is expected to “look through” these exogenous factors, cost-of-living compensation will add to inflationary pressures unless checked.
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Duncan Cotterill