Continued restraint on OCR welcome

Continued restraint on OCR welcome; other tools could be used

With renewed threats of financial instability, this time from Europe, and the likelihood of continued high unemployment, the CTU welcomes the Reserve Bank's decision to maintain the Official Cash Rate (OCR) at 2.5 percent and its lack of urgency in raising it.

“While there are increasing signs of the economy reviving, business and consumers remain cautious for understandable reasons,” said CTU Economist and Policy Director Bill Rosenberg. “Both the Bank and the government must continue to support the economy and those hit by the recession - the Bank through maintaining low interest rates and the government by maintaining sufficient government spending to support those out of work and stimulate increased employment.”

“While the Bank has signalled that the interest rate may begin to rise again in a few months, it should be looking at tools other than interest rates to resist rises in housing and other prices. In a major turnaround in the last two months, the International Monetary Fund is now advocating the use of measures such as regulatory capital ratios, liquidity ratios, and loan-to-value ratios, among other tools it had previously discarded in its deregulatory fervour. The Reserve Bank is already using liquidity requirements to try to reduce the dependence of the big four banks on short term overseas funding.”

“The government and Reserve Bank should be looking even further for ways to avoid choking off the economy's recovery and future development. It should not revert to a single minded focus on inflation, using only interest rates to restrain prices.”

ENDS

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