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Home / Business / Economy / Official Cash Rate

<i>Christopher Niesche:</i> Taking the plunge won't be any easier next time

Christopher Niesche
By Christopher Niesche,
Business Writer·
25 Jan, 2007 04:00 PM2 mins to read

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Christopher Niesche

Christopher Niesche

Christopher Niesche
Opinion by Christopher Niesche
Business Writer
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KEY POINTS:

Alan Bollard should have raised interest rates yesterday.

A rate hike would undoubtedly have caused pain for business by sending the kiwi higher and increasing borrowing costs, and also increased mortgage repayments for the many homeowners renegotiating their loans with their banks.

But a hike to 7.5 per
cent would also have been an investment in New Zealand's long-term economic growth, the short-term pain notwithstanding.

Holding rates steady - as Bollard has now done for over a year now - clearly hasn't worked. The economy is still overheated, inflation at 2.6 per cent is still higher than the Reserve Bank would like and forecast to go higher, and there is little spare capacity for business to grow.

A rate hike or two would clear the air. Out-of-control consumer spending, burgeoning imports and rising house prices all would slow. This would free up economic resources and reduce inflation, allowing Bollard to cut rates and the kiwi to fall - setting the platform for another bout of robust economic growth.

Instead, for the umpteenth time, Bollard held rates steady, but warned another hike would come if the economy didn't cool. He says that while inflation might drop further in 2007, inflation is "projected to return to the upper part of our target range through 2008 and 2009".

Taken at face value, this statement implies there won't be scope to cut interest rates until 2009.

He runs the risk of condemning New Zealand to a couple more years of the sort of anaemic economic growth we saw in 2006 - with expansion hampered by high interest rates, the high kiwi and the lack of spare capacity in the economy.

Bollard appears to recognise the need for higher interest rates, stating that unless consumer spending slows and house prices stop rising so fast, a hike is "likely" in March. Quite how he thinks that will happen in the absence of tighter monetary policy isn't clear.

And the fact that the Reserve Bank Governor didn't lift rates this week, while stating that a hike is probably necessary, calls into question whether he really will tighten in March.

* Christopher Niesche is editor of the Business Herald.

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