KEY POINTS:
Today's bleak outlook for the economy is proof the Reserve Bank focus on fighting inflation is a failed experiment, says one economist.
BERL Senior Economist Ganesh Nana said targeting inflation has "failed the needs of the New Zealand economy."
"That the Reserve Bank, in their forecast, is prepared to accept four consecutive years of negative or nil employment growth is clear evidence that New Zealanders are paying a very high price indeed for the inflation control and targeting focus of economic policy", said Nana.
Reserve Bank Governor Alan Bollard, as expected, today left the official cash rate unchanged on 8.25 per cent.
He painted a bleak picture of the economy and because of that said the bank would cut the Official Cash Rate (OCR) later this year despite the rampant inflation.
He said the forecast cut "is sooner than previously envisaged" and the bank noted financial markets are forecasting the first rate cut in October.
The economy faced "the uncomfortable combination of rising inflation and weak economic growth" - often referred to by economists as stagflation.
Bollard expects economic growth to come to a virtual standstill this year due to household spending hitting the wall and only modestly recover thereafter.
GDP in the year to March 2009 is seen at just 0.9 per cent against 1.9 per cent growth projected by the bank in March. In 2010 growth is seen at just 1.4 per cent.
This kind of low growth is what Nana sees as proof that targeting inflation as the Reserve Bank does has been a failure.
After nearly 20 years of targeting inflation and the past few years of "windfall income gains" from good terms of trade and high commodity prices, New Zealand now faced four years of "job destruction," he says.
This was a damning indictment of inflation targeting.
"It is clear New Zealand needs a change," says Nana. "We challenge all political parties to give a clear indication of their choice for New Zealand's future economic policy. Do they stand for a framework founded on the supreme goal of low inflation? Or, are they prepared to abandon the failed experiment and adopt a balanced policy framework relevant to the needs of a small, open economy reliant on the fortunes of its export sector."
"Either we continue to repeat the failures of the past and sacrifice four more years of productive potential in the headlong pursuit of inflation control, or we adopt an investment and export friendly environment that looks to use income gains to develop sustained productivity and competitiveness improvements over the long-term?"
The weaker economy and higher unemployment that the Reserve Bank's policies brings won't have much impact on inflation, said Nana, but will only "make the task of surviving in these conditions more difficult.
Nana and BERL have previously called for the Government to relax its focus on fighting inflation.
With his colleague Kel Sanderson, Nana last year told Parliament's finance and expenditure committee the woes of the financial sector were to some extent a consequence of current monetary policy.
When inflation was forecast to be above the 1 3 per cent target band, interest rates were raised to higher levels than those overseas, attracting foreign funds to New Zealand.
The increased money supply enabled rising house prices and money was pushed into sub-prime lending, reducing the soundness of the financial sector. It also caused wide fluctuations in the exchange rate.
Higher house prices reduced home affordability, but also increased household consumption among home owners who saw their wealth increasing. This consumption increase was seen by the Reserve Bank as threatening further inflation, and the cycle continued.
- NZ HERALD
