Weaker dollar ‘likely to keep inflation up’

Press, 18 March 1989, Page 8

Weaker dollar ‘likely to keep inflation up’

By

PATTRICK SMELLIE

in Wellington

Higher priced imports because of the weaker New Zealand dollar are likely to keep inflation up in the first half of this year, said the Governor of the Reserve Bank, Dr Don Brash, in Auckland yesterday. Inflation could be expected to remain about 1.2 per cent for each of the March and June quarters, he predicted. This would mean the annual inflation figure would continue to fall from its present 4.7 per cent for 1988 but the downward trend would have stopped. Many economic forecasting agencies are now looking towards inflation in the next 18 months of 5 to 6 per cent, falling back again in 1991 to about 4 per cent. Dr Brash said there should be no

doubt that the Reserve Bank would continue to pursue policies which delivered price stability in New Zealand. “Price and wage setters need to adjust their expectations and behaviour accordingly, if the costs of transition are to be minimised,” he said. For example, he advocated that the compact being meted out between the Government and the trade union movement should have restraint on the growth of wages as oap of its primary goals. “New jobs must be sustainable over the medium term, based on higher productivity or lower real wages,” he said. About 50,000 jobs had been lost because of a failure to restrain wages sufficiently. “I am cautiously optimistic about

a compact between unions and the Government,” he said. “A compact would be useful if it would lead to a greater restraint in real product wages. “But we must be wary that the trade-off is not a loss of flexibility at industry and enterprise levels.” The recent overturning of an agreement between workers and management at an Auckland engineering company, where workers had agreed to take Fridays off but work Sundays at ordinary pay rates, was a case in point. “It is not my intention to weigh into the ‘sanctity of Sunday’ debate but simply to illustrate graphically the sorts of rigidities which have acted to worsen the costs of the adjustment process, which threaten future employment opportunities,” said Dr Brash.