Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell
Editorial
Just about everyone expects the Reserve Bank Governor to cut the base interest rate in his scheduled monetary statement on Thursday. If the cut is transmitted through trading banks to mortgage lending rates, it carries the risk of adding more fuel to house prices. But the Governor needs to keep
New Zealand interest rates in line with those of the rest of the developed world, where economic growth remains elusive. Otherwise the dollar is likely to go higher, punishing our exporters.
That is the main reason for the cut. The stated reason will be inflation continues to be lower than the band of 1-3 per cent, the target the Government has set. Supposedly, the current annual rate of 0.4 per cent is "too low". Not so many years ago it was not considered so. Those old enough to remember the inflation of the 1970s and 1980s will question whether inflation can ever be too low, but the idea has taken hold in those countries still struggling for growth, that some inflation is not only good but necessary.
It may be helpful in places such as Japan where "deflation", a fall in the index of consumer prices, is blamed for inhibiting growth because, supposedly, consumers put off purchases knowing an item is likely to get cheaper. But Japan has been blaming deflation for its difficulties for a long time, and has been printing excess money in an attempt to inflate its economy for just as long. Printing too much money, delicately known as "quantitative easing", is not working very well anywhere. The United States economy started to improve when its Federal Reserve board decided to phase out the practice.
Monetary control through interest rates has proven very effective at bringing down inflation, not so good at reviving it - if that really is a wise thing to attempt. Inflation is not real growth, it is an illusion of growth. It lifts prices and incomes without increasing most people's real purchasing power.
In fact, since wage increases are likely to lag price rises, most people, most of the time, will be worse off. New Zealanders who have been there would not want to go back.
