Friday 1st September 2000
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The Reserve Bank's decision to leave interest rates alone should not have surprised anyone given the US Federal Reserve's federal open markets committee had yet to announce US interest rate trends on the eve of presidential election season.
The Reserve Bank's "do nothing" approach betrayed weakness. The Federal Reserve declined to raise interest rates but its major decision was not to relinquish its overall tightening bias. The Reserve Bank cannot beg to differ.
The Reserve Bank's "wait and see" stance suggests the bank realises it cannot rescue the kiwi by raising local interest rates unilaterally without triggering a recession. The kiwi/yen cross-rate (illustrated) shows how matters have deteriorated. The bank awaits cues from the Americans so it can move interest rates in parity with foreign hikes or gain relief for the kiwi from a greenback downturn.
The economic recovery supposedly under way is a mirage if it can be cut off so quickly at a time of an export upturn. The Reserve Bank will be leery of being scapegoated for any slump by its leading detractors in the Labour-Alliance government, which is probably why its wily governor defensively cited perception of government policy as a problem for managing money supply.
The sharemarket will be finding little reason to celebrate the Reserve Bank's decision to hold off another interest rate increase. Renationalised ACC costs are higher, despite the treasurer's reassurances. The next area of cost-counting and profit-slashing arises with reunionisation of the workforce, industrial unrest, lost productivity, and higher labour and associated costs. Export-led recovery could be poisoned by a nationwide seaports strike.
As business costs rise and productivity falls due to government policy, share dividend projections will be reduced. Foreign investment will stay away, starving the kiwi of support. Sharemarket rallies abroad may do little to buoy our own market.
Labour and the Alliance may have lost the next election over lack of potential campaign donations unless their unionising bagmen can make up for loss of business largesse. Labour is now under a takeover bid from trade unions.
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