When National came to power, the Party amended the Reserve Bank of NZ legislation, which had previously instructed the Bank to pursue the dual objective of low inflation and "maximum sustainable employment". The latter aim allows a central bank to manage how fast the economy is growing, and to influence the unemployment rate, at least in the short term.
However, Finance Minister Willis, when she came to power a year ago, removed the ability of the Bank to target the state of the economy, introducing legislation that gave the Reserve Bank the sole mandate of achieving price stability. That has been defined by the government as keeping inflation in a 1-3% bracket - so preferably close to 2%. Willis, who introduced the law, said removing the dual mandate was a “highly symbolic, important act”.
What is inflation currently in NZ? Its at 2% and so on target. Yet the Big Monopoly Banks, financial media & monetary "experts" are telling us the RBNZ will - and should - cut the OCR by 50 basis points today - maybe more. Why? Because, they say, the economy has stagnated and that's bad for business - bad for them. For example, Kiwibank's economist Mary Jo Vergara said the economy needed rate relief urgently - she says, "Interest rates are .. too restrictive .. There's no need for this sort of choke hold to be on economic growth anymore. We need that rate relief." That may be so - but what she's asking for - rate cuts to get the economy growing - is unable to be used to justify cuts. Inflation is already on target - so the sole mandate of price stability of the RBNZ has already been achieved.
What is inflation currently in NZ? Its at 2% and so on target. Yet the Big Monopoly Banks, financial media & monetary "experts" are telling us the RBNZ will - and should - cut the OCR by 50 basis points today - maybe more. Why? Because, they say, the economy has stagnated and that's bad for business - bad for them. For example, Kiwibank's economist Mary Jo Vergara said the economy needed rate relief urgently - she says, "Interest rates are .. too restrictive .. There's no need for this sort of choke hold to be on economic growth anymore. We need that rate relief." That may be so - but what she's asking for - rate cuts to get the economy growing - is unable to be used to justify cuts. Inflation is already on target - so the sole mandate of price stability of the RBNZ has already been achieved.
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
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