Overspending ‘threat to economy’

Press, 6 September 1989, Page 49

Overspending ‘threat to economy’

Wellington reporter

The recent improvement in economic indicators would be threatened if New Zealand got into a spending boom, the senior economist for DFC New Zealand, Ltd, Mr Roger Garrett, says in the company’s latest newsletter. Joining other economists who have called for higher levels of savings in the community, Mr Garrett said New Zealand’s interest rates now appeared too high by international standards. “With the vastly improved state of New Zealand’s economic funda-

mentals, real interest rates on benchmark Government stock of 7.6 per cent appear too high,” he said. But if inflation was starting to rise again, as was feared among financial market observers, high interest rates could become prolonged. If inflation peaked at about 5 per cent — excluding the effect of the July GST increase — interest rates on five-year Government stock could fall to about 10.5 per cent, Mr Garrett said.

They are about 12.2 per cent at present. But Mr Garrett said the

Reserve Bank would be well-advised to bump interest rates up soon if it feared inflation was on the rise, rather than wait for firm evidence after it had happened. Experience in the United States suggested that late action against rising inflation meant interest rates stayed higher for longer. To assist the process of lower interest rates, New Zealand needed to have a higher level of national savings.

This would mean the recent improvement in the balance of payments would be maintained.

since it would also mean there would be no spending boom nor a surge in imports.

Mr Garrett predicted the annual balance of payments on current account would oscillate between a deficit of $5OO million and a surplus of $5OO million in the year ahead. This was based on the expectation that prices for basic export commodities would strengthen another 5 to 10 per cent — a view at odds with many other economists, who believe New Zealand’s terms of trade have peaked for the moment.