Bollard's inflation targeting a failure, says economist

BERL economist Ganesh Nana

Today's bleak outlook for the economy is proof the Reserve Bank focus on fighting inflation is a failed experiment, says one economist.

BERL Senior Economist Ganesh Nana said targeting inflation has "failed the needs of the New Zealand economy."

"That the Reserve Bank, in their forecast, is prepared to accept four consecutive years of negative or nil employment growth is clear evidence that New Zealanders are paying a very high price indeed for the inflation control and targeting focus of economic policy", said Nana.

Reserve Bank Governor Alan Bollard, as expected, today left the official cash rate unchanged on 8.25 per cent.

He painted a bleak picture of the economy and because of that said the bank would cut the Official Cash Rate (OCR) later this year despite the rampant inflation.

He said the forecast cut "is sooner than previously envisaged" and the bank noted financial markets are forecasting the first rate cut in October.

The economy faced "the uncomfortable combination of rising inflation and weak economic growth" - often referred to by economists as stagflation.

Bollard expects economic growth to come to a virtual standstill this year due to household spending hitting the wall and only modestly recover thereafter.

GDP in the year to March 2009 is seen at just 0.9 per cent against 1.9 per cent growth projected by the bank in March. In 2010 growth is seen at just 1.4 per cent.

This kind of low growth is what Nana sees as proof that targeting inflation as the Reserve Bank does has been a failure.

After nearly 20 years of targeting inflation and the past few years of "windfall income gains" from good terms of trade and high commodity prices, New Zealand now faced four years of "job destruction," he says.

This was a damning indictment of inflation targeting.

"It is clear New Zealand needs a change," says Nana. "We challenge all political parties to give a clear indication of their choice for New Zealand's future economic policy. Do they stand for a framework founded on the supreme goal of low inflation? Or, are they prepared to abandon the failed experiment and adopt a balanced policy framework relevant to the needs of a small, open economy reliant on the fortunes of its export sector."