Brian Fallow : A lot of assumptions in OCR move

Will households stay cautious, spending less and saving more? Photo / Herald on Sunday

For borrowers the Reserve Bank's statement this morning makes dispiriting reading, not just because it foreshadows a relentless series of interest rate rises over the next three years, but because it does so even after making a number of quite optimistic assumptions.

It assumes that the coming spike in inflation in the year ahead will not have a persistent effect on inflation expectations and on price- and wage-setting behaviour.

It assumes that households will continue to be cautious, spending less and saving more of their incomes than they did before the global financial crisis.

It assumes that the housing market will remain subdued and that house prices will not recover their 2007 peaks, in real terms, over the next three years.

It assumes that farmers will treat the record export prices they are currently getting as a temporary respite and an opportunity to reduce debt rather than spending up large.

It assumes that businesses will start investing again.

And it assumes that sovereign debt concerns in Europe will not cause global credit markets to seize up again as in 2008.

These are defensible assumptions but they are only assumptions.

In particular there is a thinly veiled warning in the bank's assumption that inflation expectations remain, in the jargon of central bankers, "anchored".

Governor Alan Bollard said he was taking a fairly benign view of that at this stage - that people would see the effects of the GST rise and other government policy changes pushing up the cost of living for what they are, one-offs.

If not, "our monetary policy response would have to be harsher than the one that is there in this statement."

The bank expects to get more traction from official cash rate rises than it did during the last cycle, because more mortgages are on floating rates, longer-term interest rates are higher than short-term ones leaving borrowers nowhere to hide, and because banks' funding costs are systematically higher than they were last time.