Firm money ‘not hurting’

Press, 5 December 1989, Page 45

Firm money ‘not hurting’

PA Wellington The Reserve Bank Governor, Dr Don Brash, has denied firm monetary policy is hindering economic growth, in spite of a rising chorus of concern about the economy stagnating.

Dr Brash . said that business investment was being deterred not by the cost of borrowing or a high exchange rate, but by lack of demand. .

“It isn’t the cost of borrowing another $lOO,OOO from the bank which is stopping them from making)an investment,” he said.

Lack of demand was cited as the most common problem restraining businesses when the bank talked to them individually. While lack of demand could be related to high interest rates, Dr Brash believed monetary policy had to remain firm until inflationary expectations fell.

' Inflation expectations were higher than the bank wished to see them and higher than* the official targets for -inflation.

Instead, Dr Brash stood by the Reserve Bank’s firm monetary policy and promised no easing until there was evidence inflation expectations had fallen.

“We would expect as those inflationary expectations reverse then there’s room for the (interest) rate structure to move down again.”

Dr Brash said he was concerned to bring about improvements in econo-

mic growth and the balance of payments but he did not believe monetary policy had any effect on either except in the short term.

Past experience showed that a lower exchange rate, as urged by the recent Ministerial Task Force on Competitiveness, would not benefit exporters in the long run, he said. “I believe our main contribution to international competitiveness is getting our inflation rate down to low levels.”

Dr Brash repeated his statement that the wage round, averaging around 4.5 per cent so far, was too high. Dr Brash said the high unemployment rate indicated wages were already too high. “We clearly have a level of unemployment which nobody feels at all comfortable with, which establishes a ... case that the price we’re paying to employ people is higher than it would be at a full employment level.”

He said recent rises in Interest rates were not a result of a tightening of monetary policy. They were caused by the higher inflationary expectations boosted by the high September quarter inflation rate, which included the rise in GST and higher overseas prices for New Zealand exports. Overseas interest rates had also risen, so New Zealand rates had shown little or no relative rise against overseas rates.