Is Bollard boxing at shadows?
The Reserve Bank Governor has all but said there is zero reason to raise the OCR right now, but has gone and done it anyway. Perhaps in hindsight he believes that during the last inflation spiral we should have used the OCR lift earlier and gone hard. That soft approach inevitably killed our exports and now while many exporters are hanging on by their fingernails we start the process all over again.
It’s hard to get our head around this output from the Governor given the identified inputs below:
- Outlook for growth has softened
- The world economy continues its fragile recovery
- Our trading partners’ growth better than expected but future prospects are worse
- Commodity prices moderating
- Domestic demand subdued
- Household spending low
- Retail spending growing slowly
- Reduction in housing turnover and demand for domestic credit weak
- Immigration slowing and business investment low and borrowing difficult
We have said for some time that the OCR is a very blunt tool and hasn’t the finesse to do the job it is tasked to do. The fact that if you only have a hammer then everything looks like a nail would seem to be the only logic for lifting the OCR at this point.
Whether you use it early, use it hard, use it late, or use it softly makes no difference in our opinion. The OCR remains the wrong tool — it just manages the CPI by killing exports while non-tradable inflation doesn’t change. This is not the world’s best practice and needs to be revisited. We can’t pay off foreign debt without exports. Our foreign indebtedness continues to rise, so that an increasing share of our GDP is therefore going to debt servicing. The sooner we acknowledge that we need to bias our economy for exports the better our future will be.