New Zealand is enjoying a surge of economic growth, greatly boosted by the Christchurch rebuild. The expansion is one of the highest in the OECD and expected to exceed the recovery in the United States, the Euro zone, the United Kingdom, Canada and Japan over the next two years. Shops had a good Christmas, business confidence is at its highest since 1999, employment confidence has returned, wages are rising, more migrants are arriving than leaving, 53,000 more jobs have appeared in the past year.
A chairman of the United States Federal Reserve famously said the job of a central banker was to "take the punch bowl away just as the party is getting started". Reserve Bank governor Graeme Wheeler is probably right now heading for the bowl. The reason: the consumers price index rose 0.1 per cent in the last three months of last year, the second successive quarter in which inflation has exceeded the bank's forecasts significantly.
Inflation is what happens when an economy expands faster than its productive capacity can match. There are two ways to prevent it: slow the expansion or take steps to increase the economy's productive capacity.
Sadly, the second option takes more time and investment than we may have available, though the Government should have labour training programmes and other capacity-building measures in force. There seems no way the Reserve Bank can avoid raising interest rates earlier than it had intended, probably as early as next week.
It is true that the latest inflation figure, 1.6 per cent for the year, is still well short of the 2 per cent midpoint of the bank's target, but it is rising. If the bank does not act now it may be unable to stop the rate exceeding the target later in the year.
The higher inflation goes, the more severe the interest rate rises would need to be to bring it back under control. Better to touch the brakes lightly now than bring the economy to a screeching halt sometime later.
If the tightening starts next week, the bank should have time to raise the official cash rate in a series of minimal steps, rather than wait until March as economists have been expecting. The risk is that the return of business confidence is more fragile than the bank knows, and takes fright as soon as interest rates start to rise. But thanks to the rebuild, New Zealand's growth is well grounded and seems likely to remain so for another few years.
The greater concern may be that a rise in interest rates will send the dollar, already very high, even higher to the detriment of exporters. But that is a hazard exporters would have foreseen when the earthquake recovery gathered pace and they have probably hedged their exchange rates where they could.
Being election year, politicians will be quick to capitalise on any interest rate increase. The more vehement their condemnation of it, the more relieved everyone should be that the management of our money has been put beyond immediate political reach by the Reserve Bank Act 1989.
The bank's statutory independence, one of the foundations of the country's economy, has been maintained by a bipartisan political consensus for 25 years now. But the consensus could be broken under the strain of party-pooping interest rates by the bank in election year.
Mr Wheeler must ignore any political debate around him, focus on the trends he sees in consumer prices, house sales and all forms of economic activity, and act in the national interest. The sooner the punch is doctored, the more likely the party can continue in a healthy and sustainable state.