Tight money policy apparently working

Press, 19 June 1986, Page 8

Tight money policy apparently working

By

MARTIN FREETH

in Wellington

The Government’s monetary policy seems to be working without the depth of economic recession that might have been expected on overseas experience, according to a Wellington economist. Recent falls in interest rates and inflation indicated that the tight monetary stance and financial deregulation were succeeding, said Mr Peter Keenan, in a review of the Government’s policy published yesterday in the “Quarterly Predictions” of the Institute of Economic Research. Furthermore, it was succeeding with less cost in terms of lost output and employment than had occurred when similar policies were implemented in other countries, he said. Mt Keenan attributed this rP the consistency and

breadth of policy reforms, and also to the influence of a buoyant world economy. Since the New Zealand dollar was floated in March last year, New Zealand had high real interest rates, a strong exchange rate, and a decline in economic activity, which were the usual features of an anti-infla-tionary monetary policy. The policy momentum had been maintained, if not increased, mid-way through the Government’s term, Mr Keenan said. Rewards had come with consumer price Inflation down to an equivalent annual rate of 10 per cent by March, and sharp falls in Government stock rates since April, followed by the recent retail rate falls. “ Mr Keenan said the Reserve Bank may have assisted the easiiw of wholesale

recently with improvements in management of monetary policy. While the bank had not eased the target for the level of liquid funds in the financial system, it had over the last two monthhs had better success in meeting that target, he said. In that time, the bank has bought and sold Treasury Bills daily on the money market rather than using periodic bill tenders as the prime means of managing liquidity. Mr Keenan pointed out that movement in the economy, particularly lower inflation, meant interest rates were expected to decline anyway. However, Mr Keenan said the Reserve Bank might view the rate at which rates were falling as a signal that a tightening of stance was now required.