Bollard Blues?

"I don't expect the Reserve Bank Governor to get political tomorrow when the Official Cash Rate is announced," CTU Economist, Peter Conway, said today."I don't expect the Reserve Bank Governor to get political tomorrow when the Official Cash Rate is announced," CTU Economist, Peter Conway, said today.

"But the Reserve Bank knows that inflation pressures are rising. And although a higher oil price may eventually mean slower economic growth, and therefore take some pressure off interest rates, in the short term they add to inflation and could force interest rates up."

"We will have to guess what Mr Bollard is thinking about the possible added complication of a fiscal stimulus, such as big tax cuts starting early next year".

"I recently wrote a "Dear John" letter to John Key* setting out CTU concerns that the injection of a $2.2 billion tax cut in April next year could push interest rates higher than would the absence of such a stimulus."

"John Key should acknowledge that risk. Even if interest rates don't go up, they could stay high for longer or not reduce as much as they would without tax cuts."

"If interest rates end up 0.5% higher than otherwise as a result of tax cuts, then it would add over $15 a week to a $200,000 mortgage interest payment.

"There is a double standard here. When wages go up, some complain that this is inflationary. But when the stimulus to demand is from tax cuts, the National Party would have us believe that they pose no risk at all to interest rates."
*Contact Jan Farr for copy of Dear John letter.