Liam Dann: Bollard makes right call to put economy first

Central Christchurch. Photo / Sarah Ivey

Christchurch is a city full of people with stories of hardship and trauma that will never be heard in the media. There are too many to be published. But they are being be told among friends and family.

They will become part of the city's folklore and persist as a reminder that heritage and history are about more than old buildings.

But now for many residents life has become a tedious grind of traffic jams and dust, rebuilding bureaucracy and aftershocks. It won't get any easier as winter starts to bite. Clearly the people of Christchurch are going to need the nation's support long after the initial tragedy and drama have faded from the media spotlight. So it was good to see those in power taking one bold and definite step along the recovery path this week.

Reserve Bank Governor Alan Bollard's decision to cut rates - despite all the obvious risks around inflation - is admirable.

In the wake of the quake he has pushed the strict guidelines of the Reserve Bank Act to the periphery of his vision, responded to the gravity of the situation and shown us the human face of the Reserve Bank. Earlier in the week the Prime Minister made it clear that Bollard had the scope to do this.

Much has been made of John Key's comments around expectations of a rate cut. Cynics have suggested the Government pressured the bank. That's unlikely.

The Governor does not take the separation of the bank and the Government lightly and he is secure enough in his role to handle any political consequences of making rate calls that the Prime Minister doesn't like.

But what Bollard has responded to, quite reasonably, is advice from all quarters - including the Government - about the scale of this event.

The advice he is getting is that this earthquake has caused an unprecedented economic mess. Experts in Treasury, and presumably the Reserve Bank, have been crunching numbers to get a handle on the damage but these are really shots in the dark.

The Reserve Bank was careful to acknowledge this on Thursday by steering clear of some of its usual forecasting and qualifying cautiously those forecasts that it did make.

Earlier this week Fletcher Building's infrastructure chief Mark Binns made the point, to Kathryn Ryan on National Radio, that we must assume a wide margin of error on all calculations.

Pushed to give his estimate, Binns said $20 billion.

He admitted this was just another guesstimate but it is one which makes it clear he sees Treasury forecasts (at $15 billion) as conservative.

Have a think about how much it costs to build a short stretch of motorway. The next stage of the Hamilton Expressway is budgeted at $168.7 million for a stretch of just 7.2km.

In Christchurch there are hundreds of streets and many roads where (on a per square metre basis) the costs of rebuilding will compare to motorway building. The ground is so badly buckled that it is not simply a case of laying down more asphalt, the land will need to first be reshaped and rebuilt.

How many kilometres of road must be rebuilt or repaired? It is doubtful anyone in the country has an accurate assessment yet.

With the true cost of the event an unknown quantity the Reserve Bank had to take a defensive stance in its risk assessment.

In cutting rates now it has not abdicated its responsibility to fight inflation further down the track.

In fact its forecasts suggest rates will rise quickly at some stage in the next 12 or 18 months as the economy reaches capacity.

But Thursday's decision recognises that a stalled economy, further business retrenchment, failures and job losses would represent a greater burden for the nation this year than the rising cost of living.

liam.dann@nzherald.co.nz
www.twitter.com/liamdann