Headline: Reserve Bank missed opportunities for lower interest rates
New information released by the Green Party today shows that the Reserve Bank has been over-estimating the rate of inflation meaning interest rates have been kept higher than necessary.
Reserve Bank board papers released to the Green Party under the Official Information Act show that since 2011, the Reserve Bank has consistently assumed inflation would remain around the mid-point of its target band yet actual inflation has been lower meaning the Bank had additional scope to cut the Official Cash Rate (OCR).
“Poor forecasting by the Reserve Bank has meant interest rates have been kept higher over the last year than they needed to be,” said Green Party Co-leader Dr Russel Norman.
“Higher interest rates have slowed our economic recovery and kept our dollar higher, hindering economic rebalancing towards exports and import substitution.
“The Bank also highlights in the same paper the fact that our dollar has been overvalued and needs to come down to ‘stabilise our foreign debt position’.
“Our current account deficit – a measure of the change in our foreign indebtedness – is one of the worst in the OECD, second only to Turkey. Under National’s economic management, it’s forecast to get even worse.
“The Reserve Bank has missed yet another opportunity to help rebalance the economy away from further debt and borrowing with lower cash rate settings.”
Dr Norman again highlighted the weakness of having the Governor as the single decision-maker for the Official Cash Rate.
“No other country in the OECD gives full responsibility for the OCR decision to one person – the Reserve Bank Governor,” said Dr Norman.
“Treasury agree and have recommended a review of the single decision-maker feature, a review the Minister of Finance has refused without reason.
“A review of the Reserve Bank’s governance structure is well overdue given the impact OCR decisions have on the New Zealand economy. “
Dr Norman commended the Reserve Bank for implementing new measures to improve their inflation forecasting going forward.
Reserve Bank graph comparing actual inflation against forecast:
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