No trigger for bank in poll —Caygill

Press, 24 October 1989, Page 7

No trigger for bank in poll —Caygill

By

PATTRICK SMELLIE

£ in Wellington

The Reserve Bank would not raise interest rates simply because the economy was showing signs of growth and recovery, the Minister of Finance, Mr Caygill, said yesterday.

He was responding to fears that increased economic optimism shown in a poll published over the week-end would lead to dampening action by the Reserve Bank. This was based on the belief that such growth would be interpreted as a sign of increasing inflation by the bank, which targets inflation by pushing up interest rates and making economic conditions tighter. "The Reserve Bank is keen to see growth,” said Mr Caygill. "But it wants it based on real gains, not nominal price increases (inflation).” Mr Caygill admitted the increase in GST on July 1 was "inevitably” going to cause interest rates to take longer to fall, “or at least halt their decline for a while.” “But none of those effects are permanent,” he said. The important thing was to ensure that the GST increase did not lead to inflationary wage demands and price-setting into the future. He welcomed the result of the “Dominion Sunday Times” poll, which showed every region of the country was now, on balance, optimistic about the economy.

Lower interest rates since the Budget, seasonal farm income effects, and buying by merchants to rebuild their stock levels were all likely factors in the result. But he warned against focusing on changes in the economy over three-month periods rather than taking a longer-term view. He rejected calls by some industry leaders for relaxation of the Government’s zero to 2 per cent inflation goal to allow the recovery to gather momentum. “There is nothing magic about the zero to 2 per cent range,” he said. “The notion that 3 per cent inflation would produce something dramatically different to 2 per cent is rather hard to sustain. “To the extent that we are talking degrees of fine-tuning, then I’m not sure that the economy can be fine-tuned in that way,” said Mr Caygill. The zero to 2 per cent range would give New Zealand lower inflation than its four main trading partners. Japan looked likely to remain New Zealand’s biggest trading partner and traditionally had inflation of less than 2 per cent, he said.