Reasons for interest rate rise not convincing

“The Reserve Bank has not given a convincing case that general inflation is a big enough risk to raise interest rates”, says CTU Economist Bill Rosenberg. “In fact it seems to be pushing against higher wages. It is also forecasting unemployment will not fall below 5% – in current terms over 120,000 people. It appears that continuing wage stagnation and permanently high unemployment are the price we pay for these policies.”

Rosenberg, commenting on the media conference after the Reserve Bank announced its interest rate rise, noted that when pushed to describe what the inflationary pressures were, the Reserve Bank could name only construction costs and government charges – but said that “general demand pressures” would lead to general price rises and growing wages. It appears to see wage rises as something to be resisted rather than welcomed after years of wage stagnation.

Its forecasts of unemployment see the unemployment rate bottoming out at 4.9-5.0 percent in December 2014 and not falling any further in the forecast period out to the end of 2016. “These are not levels of unemployment most New Zealanders would find acceptable as a permanent state of affairs, particularly alongside stagnating wages and rising housing costs”, Rosenberg says.

“What is the problem these policies are trying to address? Is it bad to have lower unemployment and rising living standards? Should we be choking off house building when rising house prices are a risk? There is surely no suggestion we want to slow the Canterbury rebuild because of its inflationary potential. We should address the causes of rapid price increases in specific areas like housing and energy prices rather than general interest rises that hurt the rest of the economy,” Rosenberg concluded.

ENDS

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