Column: Don't mention the war

There was a touch of Fawlty Towers-style "don't mention the war" about the Reserve Bank's December monetary policy statement.

Thursday, December 7th 2000, 11:47AM

by Rob Hosking

There was a touch of Fawlty Towers-style "don't mention the war" about the Reserve Bank's December monetary policy statement.

In this case though, it was a matter of "don't mention stagflation."

Dr Brash wheeled out the term in front of Parliamentarians in August for those who can't remember the 1970s, it means no growth, high inflation, and high interest rate - and for some time afterwards found that people could talk about little else.

There wasn't even a whiff of the term about the MPS document this quarter. No sign at all. One can picture a meeting preparing the document, with Dr Brash whispering urgently "Don't mention stagflation! I mentioned it once, but I think I got away with it."

Inevitably though, he was asked about the stagflation scenario by journalists at the MPS briefing and, subsequently, by MPs at Parliament's finance and expenditure select committee.

"The likelihood of that scenario is pretty low we do not see it as being in the least likely at the moment," Dr Brash said.

The MPS was a remarkably upbeat one, considering the clouds which surrounded the August statement. This was perhaps obliquely referred to by Dr Brash in his comment to MPs that business confidence was, in the middle of the year, "excessively gloomy".

The bank still expects to have to lift interest rates at least once next year. The preference has always been to lift the rate at the quarterly MPS, where the Reserve Bank can set out its economic outlook and background the reasons for any shift in the official cash rate.

However, it does have the option of changing at the official cash rate review, which occurs half way between each MPS. It has done that before, but only once, in January this year. That move caught the market by surprise something the central bank does not like doing.

But a couple of weeks back it announced a few changes to how it presents its economic outlook. Hitherto the official cash rate review has simply been announced by a one page statement of a few sentences, but the bank now says it will put out more information at that point if it thinks it necessary.

One possible scenario is that the interest rate left alone this month will be lifted again in January. A more likely outcome though is a rate rise of 0.5% in March.

The forecasts contained in the MPS foreshadow a likely rate rise of 1% over the calender year 2001. While that is still possible - most bank economists seem sceptical of this.

It is important to remember that the world's economic powerhouses, the Untied States and Europe, are both looking at easing interest rates over the coming year. While New Zealand is at a different stage in its economic cycle, those economies particularly the US are being watched closely. In response to questions by MPs, Dr Brash observed that even with the different business cycles, New Zealand could not afford to get too out of kilter with the US market.

The MPS contained a repeat warning to businesses and employees particularly those in the non-tradeable sector and the non-exporting areas not to try to lift prices and wages too far. Just how much they will be able to restrain themselves remains to be seen the produce price index for September showed its highest jump since mid-1985, when inflation was almost hitting 20%. However an indication of just how far the Reserve Bank has moved from its stagflation scenario can be gleaned by the fact that it is not expecting that will happen.

"We have assumed that employers and employees will not adjust their behaviour to reflect the temporary spike in the inflation rate," Dr Brash said.

Is the bank being too optimistic here? We'll know in about six months.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

« The need for diversification is greater in times of turbulence

King builds an empire »

Special Offers