Economist accuses bank of deception

Press, 15 September 1989, Page 4

Economist accuses bank of deception

By

PATTRICK SMELLIE

in Wellington The Reserve Bank was accused last evening of acting politically and deceptively by allowing interest rates to fall at a time when inflation is rising.

The accusation came from Mr Gareth Morgan, an economist with the influential private sector forecasting firm, Infometrics Business Services, Ltd.

“How much evidence will it take for the Reserve Bank to be convinced that inflation, and more importantly inflationary expectations, are on the rise?” said Dr Morgan. “We are perilously close to making the mistake the United Kingdom made of relaxing (monetary policy) too early.” Monetary policy is the tool used by the Reserve Bank to control the money supply, using high interest rates to combat inflation.

Allowing lower interest rates was understandable,

given the state of the economy, Dr Morgan said.

But it was out of line with comments from the Governor of the Reserve Bank, Dr Don Brash, that New Zealand was on target for nil to 2 per cent inflation by the end of 1992.

“The Reserve Bank appears to have accepted a ‘temporary’ loss in the inflation battle.” Relentlessly pursuing lower inflation was being seen as potentially damaging to the economy, and to the political will to combat inflation in future.

This had “the potential to play a cruel trick on those who believe Dr Brash’s anti-inflationary rhetoric,” he said. The Reserve Bank was playing a beguiling game with public expectations of lower interest rates and economic growth. A tighter monetary policy, which would push up interest rates, was likely to be re-established in 1990.

But the Reserve Bank’s chief manager (economics), Mr Grant Spencer,

said there had been no relaxation of monetary policy. , Interest rate falls'since the Budget had been based on a fundamental reappraisal of New Zealand’s money market conditions and risks, particularly following the decision to repay local government debt rather than foreign debt. While long-term interest rates had fallen, the gap between them and short-term money market rates was wider than before the Budget. “In anyone’s language, that does not constitute a loosening of monetary policy,” he said. Current pressures on inflation were coming from high world prices for agricultural exports, and poor growing conditions for local fruit and vegetables. “You can hardly relate that back to excessive demand in the New Zealand economy,” he said. “The underlying level of demand is still relatively flat,” he said. “We are looking at a gradual recovery.”