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WHO IS REALLY RESPONSIBLE FOR GETTING INFLATION UNDER CONTROL?

Liam Dann (Herald on Sunday, 29 May 2022) seems very keen to absolve the Government of any responsibility for the pain which a great many people are going to endure as the Reserve Bank grapples with getting inflation back under control.


In the opening line of his editorial, under the heading “Why slashing govt spending right now would be a bad idea”, he argues that “it’s important New Zealand gets through this tough economic cycle without panicking and reaching for brutal, unnecessary and ineffective policies of fiscal austerity”.


Of course, we all hope that inflation will be reduced from its present level “without brutal, unnecessary and ineffective policies”, but as he recognises further on in his column “we have to deal with excess demand in the local economy”. The Reserve Bank has, by law, the primary responsibility for achieving that in order to return the inflation rate to the target which Government has established.


The single weapon the Bank has to achieve that goal is monetary policy, which in the New Zealand context means making it more or less expensive to borrow by varying the Official Cash Rate (OCR). When the OCR goes up, borrowing becomes more expensive and saving, by spending less, becomes more attractive. Those who have borrowed, perhaps to buy a home, find themselves paying more to service their mortgage and their other spending has to be reduced to compensate. Total spending in the community is reduced, which is precisely the objective which the Reserve Bank is seeking.


But let’s not pretend that that process is painless: it certainly isn’t. Some people find they can no longer service their mortgage, and are forced to sell their home, currently in a market where house prices are falling. As total demand in the community falls, jobs are lost, wages and salary increases are less than expected, some companies fail.


The Government on the other hand is trying to retain popularity with voters by spending up big, and that is working in direct opposition to what the Reserve Bank is trying to do.


The Governor was reluctant last week to point the finger too directly at the Minister of Finance but it is only a few months ago, in an interview with the International Monetary Fund, that he made the obvious point that “monetary policy needs mates” – which means that both monetary policy (controlled by the Bank) and fiscal policy (controlled by the Government) affect total demand in the economy, and if overall demand needs to be reduced, as currently, then the more the Government stimulates the harder the Reserve Bank has to work by pushing up interest rates.


Mr Dann sets up a straw man by comparing the present situation to the early nineties. At that time, we suffered the employment consequences not only of tight monetary and fiscal policies but of the collapse of a property market bubble, of the corporatization of many over-staffed government businesses, of the abolition of import controls and of export subsidies. Moreover, we were coming out of a prolonged period of high inflation, with expectations of future inflation deeply entrenched.


But nobody should be under any illusion: the Government’s ongoing stimulatory fiscal policy is contributing to the need for the Reserve Bank to increase interest rates, something which the Treasury warned the Minister just weeks before the Budget when the Minister decided he wanted to dole out some cash sweeteners to help low income New Zealanders with the cost of living.


It’s like a car being driven with one foot on the brake and the other on the accelerator – the more the Government stimulates the economy with fiscal policy, the harder the Reserve Bank will need to apply the brakes of higher interest rates.



See also Don Brash talking to Jack Tame on Q & A about the political challenge of inflation


2,586 views19 comments

19 תגובות


The reason NZ is in real trouble financially is the people in the current Government who we all know have NOT ever been in business on their own account but are now in charge of New Zealand as a Business. Their knowledge is based on degrees in the Arts and other non business related topics which are absolutely not related to the portfolios that they are in charge of, and this relates especially to the current Minister of Finance. The "Minister of Finance" is a Title only. He could have "Rocket Pilot" or "Garbiologist" title on his Lapel. It is all meaningless as he has absolutely no Finance and/or Accounting Degrees to provide NZ with the confidence he actually k…

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lynnsam112
lynnsam112
31 במאי 2022

This government is ONLY interested in the outcome of the next election, so fiscal policy will remain out of control as they buy as many votes as possible and get those polls up....

They are a scandalous bunch with one sole purpose and that is to destroy this country at any cost.....

The reserve bank is in a reactionary position and has no choice but to up the OCR hence pushing inflation higher -

cause (government) and effect (reserve bank) = pain & suffering (joe public)

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It's all a circus.

No wonder society is falling to bits.

No one is listening Don.

Those who have been around for a while know that there will be a painful correction sometime.

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Richard Seager
Richard Seager
31 במאי 2022

$350 won't go far towards the medical bills they're all going to have because they were coerced to have a jab, or two, or three. And now the adverts at Dunedin Airport are 'get your tamariki jabbed'.


But it's nothing compared to all that quantitative easing up until about 6 months ago. How much money did the Reserve Bank of NZ actually print during that time of 2020/2021. I've heard it was 2nd only to the US. And where does that money go? Right the upper end of town. Robertson has probably just worked out that the Reserve Bank tricked him (as did Pfizer) and is trying to put his finger in the dyke of the anger from those who…


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John Hyndman
John Hyndman
31 במאי 2022

Don Brash's explanation of the role of monetary and fiscal policy in the management of inflation is a model of clarity. The brake and accelerator analogy is brilliant.

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