Treasury admits inflation fears

Press, 6 September 1989, Page 1

Treasury admits inflation fears

By

PATRICK SMELLIE

in Wellington

Fears of a surge in inflation were admitted by the Treasury yesterday in' questions from members of the Opposition on Parliament’s Finance and Expenditure Select Committee. Confirming ! suspicions of an inflationary lift which have been breeding in the financial markets for a month or more, the Treasury said the downward path of. inflation needed to be “reestablished.” j It predicted; that interest rates would remain relatively higher during the next six to 12 months than would have been the case if inflation was falling.

The suspected inflationary surge was over and above the one-off effect of the increase in GST at the beginning of July. “Given the current inflation pressures affecting the economy, and the current level of inflation expectations, Treasury expects monetary conditions to remain firm in the near-term in order to ensure that a downward path of actual and expected inflation is re-established,” the Treasury said.

- • “Somewhat smaller reductions in interest rates, particularly short-term rates, may be evident during 1989-90 compared with future years.” This was because of the firm monetary policy stance which

“will , ! be required to contain inflationary pressures arising from the recovery in domestic spending and the forthcoming wage'round.” Ironically, some factors contributing to economic recovery are also seen as contributors to the new 'inflation. _ Thpse include high prices for our exports, driving up prices for the same products in New Zealand,) and a rise in consumer spending allowing higher profit margins to be established. The effects of a lower dollar since last August had also made imports more expensive. The Treasury has not abandoned its tareet of 0-to-2 per cent inflation byfthe end of 1992, and expects

pressure against inflation from other parts of the economy. The relative stability in the exchange rate since last August was expected to act against rising inflation in coming months along with the significant increases in manufacturing productivity since 1987; World economic growth was expected to slow over the years ahead, meaning prices for exports should also stop rising, and take some of the pressure off inflation at home, the Treasury said. “Looking ahead, there are both positive and negative features which will influence the future inflation rate and hence the degree of monetary tightness that is required.”