Editorial: Glimmers of economic hope need fostering

Opinion

Reserve Bank Governor Alan Bollard surprised everyone last week when, having lowered the official cash rate to just 2.5 per cent, he said it would probably stay that low or lower "until the latter part of 2010". That was a measure of how long he thinks it will be before the economy is growing and he needs to worry about inflation again. Or was it?

The comment was widely interpreted as a reinforcement of his warning on April 1 that it is too soon for people to be fixing their mortgages at current rates, as they were during March. He admitted, "We were a little scared a month ago that there was a sudden euphoria sweeping through the housing market in a way that might lead people to think happy days are here again, and plough back in as if nothing had changed."

That last phrase is a worry. It is possible the recession has, or will, produce a lasting change in the economy, mainly through a lower dollar. But it is equally possible the dollar will bounce back to pre-recession levels and the economy will continue much as it was. It is not for the Governor or anyone else to pre-determine what happens.

It would be unconscionable to adopt policies to prolong the recession in order to bring about changes in the economy that are generally thought desirable. Too many pundits let their enthusiasm for adding value to the country's exports override their respect for market signals.

When the economy was opened to international markets in the 1980s most people, especially the reformers, supposed that resources would flow from uncompetitive import substitution into export products that would be more refined and branded for top-shelf prices.

On the whole, it has not happened. With a few exceptions, such as wine, the country's primary industries have continued to export food and fibre in commodity form. It may be that distortions in the tax system or other public policies have interfered with investment in exports, or it may be that raw commodities provide the best returns for this country after all.

Those old 1980s phrases, "open markets" and "a level playing field", remain the keys to discovering a country's competitive advantage.

The recent financial crisis has probably diminished confidence in property investment and financial products for a good while, and the longer the recession lasts the more it might force investors into productive alternatives. But nobody would dare suggest an early recovery should be discouraged and the recession prolonged for that purpose.

Dr Bollard has not suggested so, but nor has he explained why else he regarded recent optimism as a bad thing. The Economist took a similar view last week in response to some encouraging signs for the better. "Optimism is one thing," it editorialised, "but hubris that the world economy is returning to normal could hinder recovery and block policies to protect against a further plunge into the depths."

Words like euphoria and hubris rather overstate the hope that has been expressed. Fixing a long-term mortgage at rates that cannot go much lower, or buying into a modest sharemarket rally, are hardly rash decisions.

It is the job of a central bank to ensure its currency can hold its value and thereby contribute to its country's economic stability. When recession reduces the likelihood of inflation for a good while, and the greater threat is deflation, the bank can keep interest rates low and do all it can to ensure the cost of borrowing does not hinder an early recovery.

If that is all Dr Bollard is doing, his 18-month prediction is worthwhile. But wider economic change is beyond his brief. Every glimmer of hope ought to be encouraged.