Relaxing policies not an option—Caygill

Press, 25 January 1989, Page 3

Relaxing policies not an option—Caygill

PA Wellington The Minister of Finance, Mr Caygill, yesterday acknowledged interest rates were unlikely to fall rapidly, despite his meeting with banking leaders. But he said there would be no relaxation in the tight monetary policies that have seen inflation reduced to a 20-year low. Relaxing monetary policy would be entirely futile, and would achieve nothing. “I don’t think that the level of interest rates are a reflection of monetary policy at the moment. I think they are a reflection of the historical fact that we have had high inflation,” Mr Caygill said. “I don’t think that we’ve been obsessive about inflation, but the Government has certainly placed a lot of importance on getting it down. “Unless and. until we had an inflation rate competitive with other countries we were going to continue to lose ground compared to them, we were going to continue to face difficulties selling in other countries’ markets

if our cost structure was climbing faster than theirs.

“Now that we’ve got a competitive inflation rate compared to most of the countries we trade with ... I don’t think that it’s time to change our policies, but obviously one becomes more concerned about those aspects of the economy — the level of unemployment — where we have not yet achieved the same success as we have against inflation.” Mr Caygill said in an ideal world it would be possible to lower interest rates immediately.

“But I don’t think that interest rates will fall tomorrow merely because I’ve held a meeting (with the bankers).

“I expect that the process will go on over several weeks and indeed months, in the course of this year and next.”

The, Government’s target was to get inflation down to between zero and 2 per cent by the early 19905, and if that was achieved, Mr Caygill said, he would expect interest rates to be in single figures.

“In other words, my

objective is very much a long-term one, even though I think that there is considerable urgency about the question of interest rates.”

Mr Caygill said he “respected” those banks that had decided to lower their interest rates, and said they could well get a lead on their competitors. “At this point I’m going to wait and see what the banks have to say to me when we meet, but it is not reasonable to expect that the Budget decisions can be announced ahead of the Budget. “This year’s Budget won’t be until July, it is not possible or sensible to bring it forward, and the notion that the banks might wait until July to see what comes in the Budget is ... not sensible or reasonable. “The country can’t wait.” Mr Caygill said he did not feel the size of the deficit was a significant factor in holding up interest rates, as the deficit was much lower this year than four or five years ago, and he was expecting a financial surplus in the 1990-91 year.