Economist says C.P.I. ‘bottomed’

Press, 19 July 1988, Page 21

Economist says C.P.I. ‘bottomed’

PA Wellington The recent depreciation of the New Zealand dollar reflected the market belief that inflation had “bottomed out ” Dr Gareth Morgan of the economic forecast company Infometrics, said.

“There is a widely held impression inflation has now got down to about as far as it’s going to at four to six per cent per annum,” he said yesterday. “Consequently, those foreign investors who have maintained long positions in New Zealand bond markets have decided to now dilute their positions rather than stay for the last one or so per cent of the interest falls.” Doing the latter would run a high risk of diluting the dollar positions at the same time as many other

foreign investors, incurring large currency losses. “The momentum is compounded by those with oositions in the shorter'end of the market (call and bills) trying to avoid the rush and diluting now as well - fuelled by the comments of some market players talking their book,” Dr Morgan said. The market’s actions were “an acid test of the Government’s resolve to get inflation down to zero to two per cent.” “If the market believed

the Government was serious about zero as opposed to 5 per cent inflation, they’d expect bond rates to go below 9 per cent, as opposed to the more commonly held view of 11 to 12 per cent. “Substantial capital gains in the bond market would still be in prospect, and the New Zealand dollar would not be so vulnerable,” Dr Morgan said. The action of foreign investors suggested the Government had to do more if it was to establish

the credibility of a committed low inflation objective. “Over recent weeks the stance of monetary policy has become relatively accommodatory, and the indications are that fiscal progress has slipped significantly.

“These actions are being surmised by the market in a consensus that the end of the interest falls are in sight,” Dr Morgan said. “The ball is in the Government’s court.”