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Thursday, September 13, 2012

Simply redundant?

Ganesh Nana and Winston Peters have had a baby together:
BERL report: The need for a Reserve Bank Amendment Act 2012.

This report is a policy we are all familiar with as Winston has been saying it for the last 20 years. Now BERL have rubber stamped it. It aligns with everything Dr Nana has been saying for however long he has been around too so there are no surprises here.  While it is difficult to disagree with the effect of the exchange rate and the implosive potential of the massive credit surge of the last decade I do wonder if the simple dismissal of the inflation fundamental is justified. Indeed it doesn't seem to be justified at all, it just is:
The present Act’s primary function of controlling rising price inflation was critical when it was
enacted in 1989. The world has since successfully beaten inflation. Therefore the Act is

In 1987 world inflation was high, and increasing through to 1989 when the Reserve Bank Bill was developed. In the 1990s the world beat inflation down to 2 percent to 4 percent. Inflation is now low and stays low. It was only 2 percent to 3 percent in 2011.
There is now no need for the world or New Zealand to force inflation even lower. The critical need to control rising price inflation has gone. The primary 1989 purpose of the Reserve Bank Act is redundant.

They are treating it like an historical quirk rather than the result of a dynamic process.  The reason inflation can claim to be beaten is because in some part the RBNZ legislation (aggressive targetting of inflation) set the standard for the other central banks to follow. Central banks that don't do this still have inflationary problems. To imply there need not be any concern because inflation was only a thing that existed in the old days like pounds shillings and pence and can't ever come back again is unrealistic. It is the RBNZ's persistent, single-minded pursuit of the inflation target that results in low inflation, not some external factors or The World.

The issue of how low is too low is another question and that answer has changed since 1989: starting at a 0-2% target it moved to 0-3% and is currently at 1-3%. The balancing between interest rates and inflation is far from simple even if the mechanism to deliver it (the OCR) could not be more basic and the criticism of this blunt weapon is deserved.

It is a very short report - more like a summary - and so it lacks some detail. It's fine saying inflation paranoia is a thing of the past and that using interest rates to control it results in costs in the economy (like the accumulation of debt and a high exchange rate), but there isn't any concrete proposals of what the alternative policies would look like. BERL and NZ First may be on the same page, but the page is mostly blank.


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