Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: This has to be the right call

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The massive task of rebuilding Christchurch is not expected to really get underway until next year. Photo / Steven McNicholl
The massive task of rebuilding Christchurch is not expected to really get underway until next year. Photo / Steven McNicholl

This has to be the right call.

It would have been astonishing if governor Alan Bollard, two weeks after an economic shock of the severity of the earthquake, had stood there with his arms folded saying "Sorry, can't help. Too worried about inflation late next year."

The decision to cut the official cash rate by 50 basis points to 2.5 per cent was probably made easier by the fact that the economy was already pretty frail and in a feeble state before the earthquake struck.

The recovery had petered out by the middle of last year and while things were perhaps starting to pick up early this year the earthquake dealt a blow to any nascent revival in confidence and spending.

The rate cut is intended to mitigate the risk that the hit to the economy will be made worse by uncertainty that could see households outside Christchurch trim spending and businesses delay investment plans.

The bank reckons there is a similar amount of spare capacity in the economy now as there was in the depths of the 2008/09 recession. Underlying inflation pressures are correspondingly weak.

And while the headline inflation, thanks to the GST increase, is sitting at 4 per cent the bank is encouraged by survey evidence that inflation expectations remain "anchored".

Ahead, however, is the massive task of rebuilding Christchurch, which is not expected to really get under way until next year and will take years.

That will put upward pressure on inflation, so today's rate cut came with a warning: "We expect that current monetary policy accommodation will need to be removed once the rebuilding phase materialises."

Enjoy the low interest rates while they last.

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

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