22 July 2008

OCR – Irrelevant to inflation?

The New Zealand Manufacturers and Exporters Association (NZMEA) is questioning the relevance of the Official Cash Rate (OCR). With the factors driving inflation beyond the control of the Reserve Bank and interest rates set to remain high regardless of any Reserve Bank decision to cut the OCR, the upcoming OCR announcement has become inconsequential from the standpoint of inflation control.

Rising oil and commodity prices are driving inflation above the 1 to 3 percent target range and inflation is likely to rise rather than fall in the immediate future. Retail interest rates look set to remain high regardless of OCR cuts because of the price of international credit. These two factors demonstrate the failure of our monetary policy.

NZMEA Chief Executive John Walley says, “Our monetary policy has been hurting the tradeable sector for years, and has failed even in terms of its own narrow targets.”

“High interest rates over recent years have seen our economic boom wasted on a ‘feel good’ housing bubble, rather than the development of the real economy. This has simply served to generate a massive increase in our trade deficit,” says Mr. Walley.

“We need to see our political leaders tackle this problem head on. What we have seen from the Government is some tinkering around the edges of the economy with Kiwisaver and various industry specific initiatives. Broad structural change is needed to make New Zealand internationally competitive and remedy our trade balance. This needs to start with a hard look at our monetary policy.”

ends

© Scoop Media