The Reserve Bank governor admits he has taken a risk in lowering the base interest rate yesterday. The risk is that of rekindling inflation, which is always easier to start than to stop. If Don Brash has made the wrong decision - stimulating an already strong domestic economy - we could see prices and wages rising too much by the end of the year. And he would have to take remedial steps more painful than the consequences of leaving the official cash rate unchanged yesterday.
But then, that is always the governor's dilemma. As he says in the latest monetary policy statement, there are clear risks both in reducing the rate and in leaving it where it has been for nearly a year now.
If the deteriorating world economy is worse than yet predicted, New Zealand may need the stimulus of lower interests rates to ride out a downturn in overseas markets.
On balance, the governor has decided the likelihood of a worse international downturn is greater than the risk of rekindling inflation in this country. But he does not sound sure. He has cut the official cash rate by only 0.25 per cent, describing the move as "an insurance premium" and emphasising that the reduction should not be seen as the start of a downward trend for domestic interest rates this year.
It is a smaller cut than those made in recent months by the United States Federal Reserve and the Australian central bank. It is heartening that their decisions do not appear to have weighed unduly upon Dr Brash yesterday. The Reserve Bank has made its own assessment of the forecasts from the US, Japan, Asia and Australia, finding only the Euro area to be maintaining the path predicted last year.
It is also heartening that yesterday's cut defied the expectations of most economic analysts. Perhaps their predictions were based on what they thought Dr Brash would do rather than what they thought he ought to do, but at least there can be no suggestion that he was stampeded into a premature easing.
He and his advisers within the bank came to the decision themselves and, if it is not what longtime observers of Dr Brash expected him to do, perhaps he has taken note of a recent independent review commissioned by the Government.
That review of monetary management through the 1990s concluded that he had been too slow to tighten the screws in the recovery after 1992, and too slow to ease before 1997. Nobody could have predicted that the Asian crisis would strike that year, but had the bank been faster to act after the house price bubble burst in 1996, we might have avoided the brief recession that came in 1998. In any case, Dr Brash seems to have moved more quickly this time than previously he might have done. Not until this time next year will we be able to say whether the decision was right.
Hindsight is not much use to those who must make the decision. They have had to weigh up the world outlook against the continuing strength of a domestic economy still enjoying good farm commodity prices, a low exchange rate, rising tourism, business and consumer confidence, unemployment the lowest it has been in 12 years and skill shortages in some industries.
But, as the bank observes, the strength is all in the external trading sectors of the economy. High petrol prices, a fairly flat property market and a struggling retail sector suggest the internal economy is not robust and an external downtown could leave us with not much to go on.
In that event, the delayed effects of yesterday's interest rate cut would be welcome. On balance it was probably the correct thing to do.
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