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Wednesday, July 20, 2011

Inflation interest

And with the 1-3% medium term target band (the RBNZ has had since Sept. 2002) added:5.3% year-on-year is way over, but for the RBNZ keeping the rate down is more important for the government (in both a fiscal sense and for the political considerations of lowering mortgage rates) in a recession than sticking to the band. NZ has to borrow in the short term so might as well make it a convenient rate. It is also more important to our export industry if the NZ dollar didn't appreciate any more than it has to as it would by adding higher interest rates to the attractiveness of the NZD. That's why they are keeping interest rates low as they can rather than focusing on inflation. You chuck in the Nats reneging on their pledge when they hiked up GST and all the round of price increases that it caused and inflation has spiked 5%+. Last time it got to just over 5% - back in 2008 when Labour had overheated the economy and we were awash in easy credit - the Governor put the rate up over 8% to try to bring inflation into the realms of orthodox monetary credibility. Then the recession hit and inflation fears ebbed as the austerity measures bit and the economy contracted and the rate went to 2.5% Yet I kept up my inflation paranoia insisting that the underlying pressures had not abated.

The practical and psychological consequences of abolishing the 5c coin in 2006 would be to put the smaller, staple items on a steeper upward trajectory. The basic cash items like the paper, the milk, the bus, have to go up a minimum of 10c and puts 20c as the next increment. This magnifies the effect of the inflation and it will be felt primarily by the lower income earners.

The temptation to follow suit with other economies and inflate one's way around debt - and lower the value of the currency dramatically in the process - is lingering in the background, but our oil dependency locks a high dollar into the inflation equation too, if it falls then the imported inflation from pricey oil will push up the CPI across all sectors not just energy. We appear to be caught in something of a cleft stick on that count.

As the TV news shows picked up on in their analyses, the expected 1.9% annual average wage increase doesn't compare well with 5.3% inflation. There's little hope in National's austere anti-union, anti-worker environment, running high unemployment, for wage increases to match the inflation spike and so many people's standard of living will be going backwards.

As for the exchange rate I haven't been persuaded from my long term outlook for the robust stability of the Euro - versus the USD which is a long term zilch, they might as well default on the 2nd of August for real and send in the Chinese liquidators. With the NZD so strong off the backs of Australia and China (and off a falling USD) and anticipating a rate hike and with the Greeks causing a panic in the Eurozone the current rate of 60c Euro for the NZD is very high and I can't see it staying that way for long even if the RBNZ starts increasing the rate early.



At 20/7/11 8:45 am, Blogger Nitrium said...

I'm not convinced our high inflation is due to an "overheating" NZ economy. The inflation is due Bernanke's debt monetisation and forcing investors/speculators into commodities. NZ by virtually any metric is experiencing anemic growth at best - in fact we might already be back in recession. If Bollard raises rates, it will push the dollar even higher, and put NZ into a recession for certain. Our exporters can't make decent profits with the NZD at these levels. The Fonterra auction was down again today (5% this time) as it has been for the last three months - the NZD is still up. It's rock and a hard place stuff. I would argue Bollard should LOWER rates, to kill the NZD currency speculation and help our exporters.
I still have significant savings of Euros in a European bank from when I worked there, always thinking the NZD was too high. Now I'm like a deer trapped in the headlights - "lost" 20+% on the exchange rate in literally a few months.

At 20/7/11 11:17 am, Blogger bchapman said...

Surely there are other factors at play than speculaton in commodities. We simply do not have enough oil and we cannot grow enough food.

As oil beomes harder to extract and the climate becomes more unpredictable this problem is not going to go away.

At 20/7/11 3:33 pm, Blogger Frank said...

In the "Old Days", we could just de-value the dollar, instead of letting currency speculators play silly-buggers with it's value, and stress-out our farmers and other exporters...

But we can't de-value anymore. That was taken out of our hands.

It is somehow more preferable that currency dealers make obscene profits on speculation. Yeah, right. *facepalm*


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