Looser monetary policy risky?

Press, 25 January 1989, Page 3

Looser monetary policy risky?

Getting lower interest rates through a looser monetary policy risked a surge of inflation in six to nine months time, the former Minister of Finance, Mr Douglas, said yesterday. He was joining the debate over interest rate levels, which have seen key Government Ministers trying to talk rates lower in recent days, while bankers have called for a looser

monetary policy. Easing off on monetary policy would cut banks’ funding costs. “But it would do so at the expense of creating a resurgence of inflation six to nine months later, which would boost interest rates again,” Mr Douglas said.

Getting interest rates down was not a problem, as long as the Government removed un-

certainty about its policy direction. This was putting 2 to 3 per cent on wholesale money market interest rates, which then fed into home and business mortgage interest rates. Holding Government spending, reducing the financial deficit without a tax increase, continuing asset sales, and maintaining a firm monetary

policy would ensure lower interest rates, he said. He criticised comments targeted at the banks as sending “totally the wrong signal.” “It could encourage a feeling that the exchange rate is at risk. A collapse in the exchange rate would boost inflation, increase labour costs, and inflict serious damage on our exporters,” Mr Douglas said.