6.75% or 7%?
WIll the Governor of the Reserve Bank raise the interest rate today? Almost everyone thinks he will - and if he does it will keep our exchange rate high and make our current account deficit worse; but will supposedly reduce inflation as businesses cut back and mortgage repayments suck money out of consumer demand. It's a blunt instrument that may not be working too well for this economy. As we are repeatedly told: NZ's central bank has the highest rates of any developed country.
Many are concerned that the official cash rate's (overnight rate) influence on monetary policy is becoming less effective for various reasons as banks find other sources of finance and their liquidity rates apparently are so loose they can now loan out at 100% of a property's value! Despite Cullen trying to talk the dollar down, poor business confidence and the inflation target blow-out our dollar is still over €0.58c which is very high. It is a perverse vote of confidence by the rest of the world in our precarious little economy.
As I've said before the Reserve Bank could help our exporters out by popping the exchange rate bubble by saying inflation will be at 4% next quarter and not raising the rate. It would fall then... surely. But Dr Bollard's mission is to get inflation under 3% - and you do that in this system by raising the interest rate - regardless of all the other consequences.