Reserve Bank Must Act Against Inflation Expectations

"The test of the new Policy Targets Agreement will be the practical decisions of the Reserve Bank under it", Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

"Already inflation has been running at over 2.5 percent on average in the last three years, and inflation expectations have crept up.

"Higher inflation would increase interest rates and do nothing for economic growth.

"It is hard to see the advantages of a narrower 1-3 percent band, and there is a risk that it will be interpreted as foreshadowing an easier monetary policy. If annual inflation were to average 2 percent, the mid-point of the band, the Consumer Price Index would increase by around 22 percent in a decade, an outcome hardly consistent with price stability.

"As the new governor of the Reserve Bank, Dr Bollard will have to act firmly to ensure that the hard-won credibility of the Bank's commitment to price stability is not thrown away. This is the third modification to the PTA in the six years of MMP, which must be of concern to investors looking for stable policy settings in New Zealand.

"For its part, the government needs to match its goals for better economic growth with credible pro-growth policies, such as fiscal discipline and increased flexibility in the economy, which will also facilitate the Reserve Bank's task", Mr Kerr concluded.

ENDS

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