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Monday, October 17, 2005

Inflation now at 3.4% A way out?

Our inflation rate for the last year to September was 3.4% according to the Stats NZ. That is above the 3% target agreement that the Governor, Dr Bollard, is contracted to produce. It's the only KPI that really counts - and he has failed. The fine print I believe refers to "in the long term" but given rising oil costs this breach will surely go on for more than just this quarter.

I have noted earlier what people are now being bombarded with almost on a daily basis now: that the account deficit is too high and we will pay for it possibly sooner than later.

On the 27th Oct. Bollard is likely to raise the reserve bank's key rate up to 7%. It is the highest in the developed world already. What will this do? Keep our exchange rate up as there is more demand for our money - despite the inflation. And make it more expensive for everyone with a mortgage... eventually. Slow business down and bring inflation below 3% maybe next year some time... maybe... hopefully.

Treasury, and probably every economist, believes the dollar must fall. But it won't if the rates are high, inflation is low, and the credit rating is high. Hit one of those and we could get the sudden readjustment needed. But the Reserve Bank has no mandate to manipulate the dollar value except in an emergency - this is a real weakness in our system. We perhaps need a Trade Weighted Index target as well as an inflation target... something to think about.

One way out I can see is this "nationalist" package to reduce inflation and lower the dollar:
1. Reduce mortgage activity and the over-stimulated housing market by legislating that citizens only can purchase freehold property.
2. Introduce an individualised Superannuation Fund (ie. start by converting the Cullen Fund) with forced contributions in lieu of a tax cut to be phased in (employer contributions too?) over time. In Singapore during the 80s they hiked the level of contributions to dampen inflation - it would work here too.
3. Reduce the value of the dollar by bringing the bank rate down instead of up. Would that be a signal or what!? Combined with a 3%+ inflation rate will foreigners want to stick their money in NZ?
4. Reduce the target immigration figure to 20,000, starting with abolishing the family reunification category and making it virtually impossible for non-English speaking and 50+ year olds to immigrate here.

I know the landing may be a bit rough, and the mix suggested may cause inflation to spike as the dollar comes down and we pay more for our petrol and plasma screens in the short term - but we really do need to be weened off these habits and provide for future good habits. Selling ourselves off to foreigners like a cheap hooker has to stop. It does sound rather nanny-ish, but what will make the economy prosper in the long term and what will provide the best lifestyle and wealth results for New Zealanders? It seems reckless that the Reserve Bank and Treasury does not have a mechanism to affect the exchange rate.

The problem is when banks have ads touting they will give you a mortgage for "100%" of a property it makes it very difficult for people to stop borrowing. Restricting credit by increasing the trading banks' assets ratio might have to be looked at in the suite of actions available to Bollard in his aegis of running a robust banking and credit system. You can do all this without hurting business (and therefore employment) by lowering the rate of borrowing for businesses (as opposed to property speculation - which will become trickier for foreign speculators). The immigration policy will also affect the dollar independently of the other measures - that's how important they are to our current system of speculative growth, over-consumption and under-saving.

3 Comments:

At 18/10/05 4:38 pm, Anonymous RR said...

Two choices, 'stick' solution: remove tax advantages of property investment (ie depreciation, expenses deductibility, etc) to incent us away from debt-funding our retirement, or 'carrot': individualising the Cullen Fund and allowing us to save before-tax dollars ourselves in 'productive' investments offshore/onshore, doesn't matter.

 
At 24/10/05 9:30 pm, Blogger Terence said...

Tim,

Up until recently at least, our trade deficit was not readlly a 'trade' deficit as such. Imports more or less balanced exports. It was the 'invisibles' which tipped us into deficit (invisibles being repatiation of foreign business proffit). Do you think that this is an issue? Is this a linger part of the hang over of privitisation in the 1980s?

I don't know myself, but I thought I'd ask, seing as you seem to be pretty well informed on all this.

cheers

Terence

 
At 26/10/05 1:14 am, Blogger t selwyn said...

Terence: Privatisation and deregulation in the '80s provided the template for the current account blow-out we have today - that is true. Muldoon had a vision for energy self-sufficiency that never panned out - if it had (which would have required a sustained long-term high international oil price) things would have been different (if that's not too much of an obvious statement to make!). In those days of the "command economy" the exchange rate was tightly controlled and inflation was not - now days it is the other way round. Without any counter balance by government (eg. compulsory savings/super scheme) we are in a difficult bind.

I'll put a up anopther post on this issue latyer today as Bollard's statement about the OCR is tomorrow.

 

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