Intervention denied

Press, 7 December 1988, Page 8

Intervention denied

By

PATTRICK SMELLIE

The Reserve Bank is not intervening to keep interest rates high, but still believes future expectations about inflation levels are worrying, the bank’s governor, Dr Don Brash, said yesterday. He was responding to criticisms made on radio yesterday morning by Mr Kel Sanderson, an economist with Wellingtonbased consultants, BERL. Mr Sanderson said the bank was making the rising interest rate situation worse by failing to adjust monetary policy settings in line with falling inflation.

In forecasts released last week, BERL said inflation in the wholesale and retail sectors of the economy was now about 1 per cent — within the

range sought by the Government’s anti-inflation-ary policies. This was backed by statistics showing producers’ input prices were actually falling when industries affected by booming world commodity prices were excluded.

Mr Sanderson traces the present rise in longterm Government stock rates back to the rise in short-term rates after the Labour Party conference in August, feeding through to long-term rates now.

But Dr Brash said the rise in interest rates “reflected uncertainty about the political situation and fiscal prospects, and perhaps movements in interest rates overseas.”

It was not the result of any monetary policy actions.

Expectations about future inflation unfortunately remained too high, Dr Brash said, citing the latest National Bank survey of business opinion, which showed inflationary expectation of 6.3 per cent for the year ahead, compared with an annual rate at present of 5.6 per cent.

“Monetary policy will remain on its present path,” Dr Brash said.

“Aggressive action by the Reserve Bank to reduce interest rates would almost certainly lead the market to believe that there had been a U-turn in Government policy — probably eventually pushing all interest rates higher and sparking a resurgence of inflation,” he said.