Reserve Bank shouldn’t raise interest rate

“It is important that interest rates are kept at no more than their current levels”, says CTU Economist Bill Rosenberg. “Unemployment is still high despite signs of growth in the economy. Wages need to rise in real terms after years of stagnation. Businesses need to invest in areas other than property to create jobs.”

“There is strong pressure from the banks to increase interest rates, but that should be resisted. Instead the Reserve Bank should be looking at more active use of macroprudential policies to address interest rates, rather than focus them only on financial stability as they do now. For example, depending on the problems being faced they should consider more strongly focused sectoral capital requirements for banks, and make more active use of the core funding ratio as a means to control the availability of credit, particularly that funded from overseas.”

Interest rates rising faster than the rest of the world will raise the exchange rate, making it even more difficult for exporters. There is a real risk that the faster interest rates rise, the more that growth in the economy, wages and employment are choked. It would also make it more tempting for banks to increase their borrowing from overseas to fund credit growth here, worsening the situation as it did during the 2000s.

Interest rate rises will also make house ownership less affordable by adding to the cost of living for people with mortgages and other borrowing. The Government needs to take more urgent action to stabilise house prices.

New Zealand is not doing well on unemployment: at 6.2 percent, it is 13th in the OECD despite New Zealand having the 5th highest growth rate. Treasury forecasts suggest it will fall only slowly from 150,000 out of work now, still being at 130,000 in 2017. There needs to be a much stronger focus on employment growth.

The Reserve Bank will make an announcement tomorrow. It should take a broad view of its responsibilities towards housing affordability, exports, employment, wages and a balanced economy. If the Government is not doing these things, it needs to take up some of the slack.

ENDS

For further comment, please contact:
 
Bill Rosenberg, Economist, CTU
04 802 3815 / 021 637 991
 
Georgina McLeod, CTU Communications and Campaigns Advisor
027 501 6880 / 04 802 3817

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