Nick Smith on business

Nick Smith is an award-winning freelance writer

Nick Smith: When the pressure goes on - resist

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Reviving Christchurch is a job for the Government, not Alan Bollard.

Unlike the Government, Reserve Bank Governor Alan Bollard's role is to use monetary policy to deliver price stability and keep a lid on inflation, not to be pressured into responding to national calamities. Photo / Getty Images
Unlike the Government, Reserve Bank Governor Alan Bollard's role is to use monetary policy to deliver price stability and keep a lid on inflation, not to be pressured into responding to national calamities. Photo / Getty Images

I am writing this column ahead of yesterday's Official Cash Rate announcement in the hope the Reserve Bank held the line against strong pressure to deliver a cut in response to the tragedy in Christchurch.

If Governor Alan Bollard did cut - and the market was pricing in a 25 basis point reduction - it was the wrong decision.

With any luck, Bollard will have held his nerve and kept the rate on hold.

But he would have signalled to the market that the next move may be down, depending on the future course of the economy.

This is not for reasons of form, although it is certainly not part of Bollard's brief to offer explicit support to the shattered Garden City; that is the Government's job.

The Government, which is refusing to rule out stern measures in its upcoming austerity Budget (measures that threaten to intensify recessionary conditions), is supposed to use fiscal policy to gee along a stubbornly sluggish economy and help a beleaguered city recover.

It's worth noting that Christchurch is getting the fiscal policy support it should; the economy is not.

Bollard's task, in contrast to the Government's, is to use monetary policy to deliver price stability and keep a lid on inflation. His role is not to knee-jerk respond to each and every calamity, whether man-made or of nature's making.

When oil prices soared, contributing to high inflation, Bollard rightly looked through that one-off impact and held the line. Similarly, when GST increased, causing an inflationary spike, the Reserve Bank proved unflappable.

What made yesterday's decision difficult was the Governor's previous unwillingness to reduce rates in the face of bad news: a routed retail market, record low house sales, negative house prices, unprecedented low construction rates, worryingly high levels of emigration and increasing unemployment. Bollard kept saying he was going to raise rates when economic conditions improved. They didn't but the dollar sure kept rising.

According to Annette Beacher, the economist who first called the double-dip recession in mid-December (or triple-dip, if you accept that the five quarters were concurrent but separate recessions caused by drought and the financial crisis, respectively), Bollard should have cut much earlier.

After all, the September quarter printed negative, sub-zero figures are expected for last quarter and the earthquake has surely put paid to GDP for the three months to March.

If the Reserve Bank did relent yesterday, it was a belated response to recessionary conditions, not a shot in the arm for Christchurch. But cutting rates will not help Christchurch. If anything, it will harm the recovery. Canterbury entrepreneurs and exporters need a low dollar to get back in the game.

As soon as a cut is delivered, Beacher says, the market starts pricing in the next rise and the dollar goes up again.

By holding the line and indicating a reduction is on the cards, the market is left pricing in a cut and waiting, as do we all, for signs of a recovery beyond Christchurch's reconstruction and the trickle-down effect from rural wealth.

What is strange about recent debate is that commentators have cast Alan Bollard, not the Government, in the role of economic saviour or villain, depending on his cash-rate whim.

But that is not his role. The Government, whose role it most definitely is, has taken the part of fiscal prude, to widespread applause.

But that's the Reserve Bank's role, and has been for the past 25 years.

This is a most unwelcome switcharoo. After all, it's traditional for the Government to cave to public pressure, not its independent instrument of fiscal policy.

The Author

Regular columnist Deborah Hill Cone is taking a break. Nick Smith is a freelance business writer who has won eight Qantas media awards, including three for business writing, a David Low fellowship to Oxford University and, before journalism, was an Elvis impersonator in an Auckland theatre restaurant.

- NZ Herald

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