KEY POINTS:
Reserve Bank Governor Alan Bollard fired a warning shot across the Government's bows yesterday over the dangers of an election-year Budget lolly scramble.
He also flatly contradicted Finance Minister Michael Cullen's claims that the Government is not contributing to inflationary pressure.
Late last month Dr Cullen reported an operating surplus of $8.6 billion, $2 billion larger than forecast, and a cash surplus of $2.6 billion, $900 million bigger than forecast.
That showed, Dr Cullen said, that the Government was removing more demand than forecast from the economy. "It would be difficult to argue that the Government is contributing to inflationary pressure." But Dr Bollard yesterday did just that.
Announcing his decision to leave the official cash rate on hold at 8.25 per cent he said: "Despite ongoing surpluses in the Government's operating balance, fiscal policy is contributing to inflationary pressure. Any further easing in fiscal policy beyond that already announced will add further upside risks to medium-term inflation."
As the Reserve Bank already forecasts inflation to reach 3 per cent, the top of its target band, by the end of this year and stay there or thereabouts until late 2009, that statement is an implicit reminder that he cannot be expected to accommodate further upward pressure on inflation.
Bank of New Zealand head of research Stephen Toplis said Dr Bollard was right and Dr Cullen wrong about whether Government policy was putting upward pressure on inflation and therefore interest rates.
"Look at what would have happened to retail spending as a result of the Working for Families package, for example ... To be fair the warning, while directed clearly at the current Government, is also being directed at the opposition parties."
The problem was the chances of a further loosening of the Government purse strings were just about 100 per cent, Mr Toplis said.
"You can't go into an election campaign with a strong balance sheet and wildly large surpluses and tell people you can't afford to spend any money. Tax cuts are a good thing. So is a glass of wine ... but not after you have had 15 of them. It's all about timing."
