The swings and roundabouts in the New Zealand dollar were a dominating factor for businesses over 2009. The New Zealand dollar started the year in free-fall, dropping 15% over January. But after themonetary floodgates opened, the kiwi staged a massive 44% rally over the nextseven months.
One of the disconcerting factors in theReserve Bank’s Monetary Policy Statement released earlier this month was theinclusion of forecasts for inflation excluding the effects of food and energyprices. Price rises from these two sources are responsible for more than halfof the lift in the CPI over the last year, so if we exclude these components,inflation looks much more respectable at just 1.6%pa.
Following the Reserve Bank’s Monetary Policy Statement earlier this month, some economists are questioning the need for the Bank to maintain a strict inflation target. Some have gone so far as to say that inflation targeting has failed to improve New Zealand’s economic wellbeing and should be done away with altogether. Such attitudes are scary – inflation targeting by a credible central bank is a vital part of sound economic management.
With the New Zealand dollar surging tonew post-float highs on a regular basis, the viability of exporting is underthreat for those outside the dairy sector. The pressure on exporters has seen US professor Steve Hanke recently assert that our economy is in a "death spiral". Hestated that "you get a flood of capital coming in chasing the high interestrates, and the flood of capital, of course, aggravates the inflation problem"leading to even higher interest rates.
The Reserve Bank’s recent intervention inthe currency clearly signals their belief that the current New Zealand dollar exchange rate is unjustified by economic fundamentals. But how much confidence can we store in the statement that the kiwi is "overvalued"?
Alan Bollard’s recent reappointment asgovernor of the Reserve Bank for another five years saw Michael Cullen lauding"his integrity and outstanding general management skills". Those qualities maynot be in question, but in terms of actually doing his job and keeping acredible rein on inflation, Dr Bollard’s results have been unimpressive. Nevertheless, this year’s interest rate rises have shown a steelier side to theReserve Bank governor, and imply little hope of relief for mortgage holders inthe foreseeable future.
Annual average GDP growth is at a seven-yearlow, but economic forecasters appear to have broadly accepted the ReserveBank’s commitment to raising interest rates higher. This combination suggeststo us that the Reserve Bank has explicitly grown less accepting of medium-terminflation pressure, and that it has largely convinced the market that anaggressive stance is necessary.
Petrol prices in the March quarter were at their highestlevel, in real terms, since 1986. This article examines the outlook for oilprices, their effect on people’s behaviour, and the resultant impact onmonetary settings and the broader New Zealand economy.