Bollard's predecessor gives him a pass mark

By BRIAN FALLOW

Dr Alan Bollard's first monetary policy statement got the big tick yesterday from his predecessor as Governor of the Reserve Bank, Dr Don Brash.

When Bollard appeared before Parliament's finance and expenditure select committee Brash, now National's finance spokesman, said he would not wish to change a word of the statement.

"It seemed a very balanced assessment of the economy," Brash said.

But despite the bonhomie, the two men did not see entirely eye to eye.

Brash said he saw from a speech Bollard made on Monday that he did not expect inflation to be too different from its level in the past decade.

"Is that in fact realistic, given that the floor of the target has been raised and you quite clearly intend to change interest rates as infrequently as you can? Is there some risk you might end up with both slightly higher average inflation and potentially more variable inflation?"

Bollard conceded there was that risk but said he hoped, and expected, it would not eventuate.

"It's true we have raised the floor from zero to 1 [per cent] but, as you are aware, that has not been an active area for inflation outcomes over the past decade," he said.

"We hope we will still see the same sort of inflation outcomes, but I'll be judged on that."

In response to another question from Brash, Bollard said the bank was still using a forecasting model that was set to return the consumer price index (CPI) to the middle of the target range over time. That might be adjusted in the future.

But as Brash knew, the Governor did not simply rely on the model's projections, Bollard said. "There is a lot of judgment that goes on as well."

The bank was not running monetary policy to return to the mid-point of the inflation range, he said.

"We talk about ensuring inflation gets back, within that appropriate period, comfortably inside the range.

"I would decline to say in numbers what 'comfortably' means, because it would mean different things at different times.

"We want to make some use of the room within that range."

He hinted that the statement might have been slightly more hawkish if written under the old policy targets agreement.

"We have a different projection for the CPI this time. A lot of that is [because of] different conditions, but you can hypothesise about what degree of comfort we might have had under the old PTA, given a CPI track that comes down but doesn't get back to the mid-point of that old range in the out years and is a little stronger than it was in August."

Bollard said the bank would be watching the housing market and construction sector closely, noting the strong Real Estate Institute figures, which had been released after the bank's forecasts.

But the bank's view was that, overall, the risks to the growth and inflation outlook were balanced.

Brash asked if the bank was assuming the fall in inflation would be driven by the tradeables rather than the non-tradeables [domestic] sector. Both, said Assistant Governor David Archer. Tradeables inflation was expected to fall next year as an appreciating currency and lower world commodity prices lowered prices for imports and exportable goods.

"But as you go out and the pressure comes off resources, non-tradeables inflation would drop back too."

Differentials between New Zealand and overseas interest rates might be an element in the New Zealand dollar's appreciation, Archer said, but the relationship between interest rate differentials and the rise and fall of the exchange rate was not predictable.

New United MP Gordon Copeland began his questions by admitting that this was the first time he had read a monetary policy statement cover to cover.

"Me too," said Bollard.