Reserve Bank Governor Adrian Orr and his monetary management committee will know employment is above a sustainable level. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr and his monetary management committee will know employment is above a sustainable level. Photo / Mark Mitchell
EDITORIAL
Stockmarkets in New York hit another low yesterday. This would sometimes be bad news but right now it is not.
Stockmarkets are falling because investors believe the United States Federal Reserve Board is absolutely determined to bring inflation down by raising interest rates until it succeeds.
Credibility is essentialto that task. The US central bank clearly has established the required credibility and the Reserve Bank of New Zealand appears to have it too. For that, we can be glad.
Achieving such credibility will not have been easy after 30 years of very low inflation. The monetary actions of the US Federal Reserve over that period led investors to conclude it was mainly intent on maintaining the stability of stock prices.
Thanks to a sequence of large interest rate increases by the Fed this year, investors now know differently.
In this country, the credibility of the Reserve Bank's inflation-fighting chops has not been helped by its brief from the current Government to maintain two good things at the same time: low inflation and low unemployment.
Illustration / Rod Emmerson
If both are too high, as happened in the 1970s, which would the bank tackle?
So far, in this inflation fight, the dual mandate has not presented a problem.
Unemployment is negligible – employers need more workers than they can find.
Employees are switching jobs for higher pay and wage levels are rising, contributing to inflation as higher incomes are being spent and producers raise their prices to recover their rising costs.
Ultimately, this does nobody any good. Wages are not rising as fast as prices, meaning real incomes are falling, profits are being put into hedges against inflation rather than productive investments. The dollar is losing value, which will lower our living standards.
All this is the damage inflation does if it is not contained.
Essentially the task is psychological. "Expectations," as they say, "are the key".
If price-setters and spenders expect inflation to continue, then their pricing and spending decisions will ensure it does.
If, however, they are convinced the authorities will not allow it to continue, behaviour will change.
Spenders will wait for prices to ease, producers will cut costs instead.
The economy may contract for a period, unemployment may rise.
There is good reason to believe Reserve Bank governor Adrian Orr and fellow members of his monetary management committee are prepared to let this happen. In their language, employment currently is above a sustainable level.
Central banks generally appear resolute and determined to defeat inflation; governments are not generating as much confidence.
They may be forgiven for over-stimulating their economies in the fearful first year of a pandemic but they now need to play their part in containing the inflationary consequences.
They can best do so by reducing their own spending, which would also repair their budget balances and debt levels quicker.
Business leaders made this point to our Government in our "Mood of the Boardroom" survey last week.
The sooner the Government stops unnecessary spending, the sooner inflation will be beaten.
