Saturday, July 28, 2007

Bollard beats Bernanke Again

Well, New Zealand could not win the America's Cup for yachting, but we have managed to keep the record for having the highest interest rates in the world. Yesterday Reserve Bank Governor Bollard raised the OCR to 8.25 percent. Beat that Ben Bernanke!

The reason for the increase is concern about inflationary pressure. Bollard the banker is worried that the economy is growing too fast. His new worry is strong world commodity prices increasing value of dairy exports. However,
an increase in the international price of exported commodities does not cause inflation. The incomes of exporters may increase, but the economy will be able to import more goods and services to meet the resulting increase in demand.

Anyway, as I have said before, we do not need a banker to slow down the economy.

Furthermore, a quick look at where the price pressures are coming from shows that increased interest rates will have no affect.

Over the last year, electricity prices have been increasing. That is caused by two things: cross subsidies from businesses to households have been removed and growing demand for electricity requires increased generation capacity which is more expensive. Higher interest rates will not change that.

Local authority rates are skyrocketing as local government politicians chase their dreams and then raise property rates to pay for them. Bollards intervention will not stop that.

The government is spending like crazy to win the next election. The Reserve Bank action does nothing to stop that.

Our monetary policy is just a twisted masochism. It cannot solve the problem it pretends to solve, but it punishes the productive parts of the economy.

See also

Bollards Blunder

Ratchet Down

Bollard goes to the Dentist

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