CTU media release
9 September 2009
Reserve Bank should cut OCR and look at other options in fight against rising unemployment
A further cut in the Official Cash Rate (OCR) would be a helpful contribution to head off rising unemployment, said CTU
Economist and Policy Director Bill Rosenberg today. However the Reserve Bank should also be looking at other options.
The CTU suggests that low interest funds should be made available through the Reserve Bank to build new housing. As well
as directly providing employment, this would increase the supply of housing to keep house prices down, provide
competition to unacceptably high mortgage interest rates, and signal an effective depreciation of the New Zealand dollar
to financial markets which may help to lower the exchange rate.
The Reserve Bank Governor Alan Bollard will make an announcement tomorrow on the OCR as part of the Bank’s Monetary
Policy Statement.
While there are some signs that the fall in economic activity is bottoming out, there is still considerable uncertainty.
Most importantly, all forecasters agree that unemployment will continue to rise for another year, to 7.5 or 8 percent or
170,000 to 180,000 people looking for work by this time in 2010. Unemployment is expected to fall only slowly after that
peak, with unemployment rates above the current 6.0 percent until at least 2012.
“It is essential that this level of pain is not accepted as inevitable, and more action be taken to reduce it,” said
Rosenberg.
“We acknowledge that the Reserve Bank has limited power to improve the situation, and that more should be done by
Government through fiscal measures such extending the home insulation scheme, other ‘green’ development projects, and
support for skills development. According to the OECD, its stimulus so far has been largely confined to tax reductions,
benefiting mainly high-income earners, and its effect has been offset by a net decrease in government spending. We are
concerned at the lack of urgency the government appears to be applying to this oncoming social crisis.”
“However, there are innovative ways in which the Reserve Bank could help. We recognise its concern that lower interest
rates could lead to another housing price bubble. At the same time, we note the construction of new housing is at an
8-year low, with plenty of capacity to ramp it up in a sector that has been particularly hard hit by unemployment, and
with skills we need to retain.”
“The Reserve Bank could provide low interest finance for new housing construction. The funds made available would need
to be at a level that did not exceed the construction sector’s ability to build the houses. As well as directly
providing employment, such an action would have a range of other beneficial effects, including increasing the supply of
housing to keep house prices down, providing competition to unacceptably high mortgage interest rates, and signalling an
effective depreciation of the New Zealand dollar to financial markets which may help to lower the exchange rate. The new
housing finance could be provided through banks (on condition they pass on the low interest rates) or through Housing
New Zealand and local government for rental housing.”
ENDS