Economic researcher calls on Reserve Bank to hold interest rates

By NZPA

Wednesday 7th March 2007

The Reserve Bank is widely expected to raise official interest rates tomorrow, but independent economic researcher Berl wants the bank to remain unmoved.

Bank Governor Alan Bollard should resist calls from those narrowly focused on taming excesses in the housing market, Berl senior economist Ganesh Nana said today.

Rather, Bollard should continue focusing on the needs of the wider economy, particularly the export sector.

As well as leaving the Official Cash Rate (OCR) unchanged, Bollard should issue a strongly worded statement that it was neither the Reserve Bank's role, nor the function of monetary policy, to control house prices.

He should point out that the Reserve Bank remained focused on maintaining a stable general level of prices as specified in its agreement with the Government, Nana said.

Bollard's commentary should stress the importance of non-housing sectors of the economy.

He should say that those narrowly focused on the housing sector risked overlooking the long-term damage to the economy caused by sacrificing the export sector in order to rein in the excesses of the housing market.

If the Government wanted the housing market to be the focus of the Reserve Bank then Bollard should advise the Government that a revision of the agreement between the two would be needed.

That would include a properly specified house price inflation target, and most importantly, the Reserve Bank would need another policy instrument or tool, as the OCR alone would not succeed in achieving a house price inflation target.

Nana said the Reserve Bank should issue another strongly worded statement that the medium term outlook for inflation remained well within the 1% to 3% range as specified in the bank's agreement with the Government.

The bank should say that while some inflation measures were elevated, all were heading in the downwards direction and, on average over the medium term, there was no reason to expect further increases in the OCR.

The OCR has been at 7.25% for 15 months, but in his most recent announcement on the rate, in January, Bollard said it was increasingly important the domestic economy had rebounded in the fourth quarter of 2006.

While the near term inflation outlook was relatively benign, the bank remained concerned about the risks of higher inflation in the medium term, he said.

Without clear indications of a moderation in housing and domestic demand, it was likely further policy tightening would be needed.

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