Reserve Bank Governor Allan Bollard has raised interest rates by a quarter of a percentage point to 7.25 percent, the highest in the industrialised world, and said “further tightening may be needed to control inflation.”
Mr Bollard has got a few things wrong, but we’ll have to pay the price.
New Zealand doesn’t have an inflation problem, it has an economic distortion problem.
Inflation is caused by governments “inflating” (and consequently diluting the value of) the money supply, usually to cover deficit spending. We don’t have deficit spending, so we don’t have true inflation.
What we have is rising prices, specifically in the housing sector. Why, because a lot of Kiwis have figured out that the best way to save for their retirement is to put a lot of their cash into expensive property and reap the untaxed capital gain profit down the track.
They do this because taxes are so high, wages are so low and business is such a bloody struggle, that it is not worth investing their money elsewhere. This is resulting in house prices going up while other areas like the stock market, pension funds, small businesses etc are neglected.
The socialist answer is to propose a capital gains tax on private houses. They would do it in an instant if it wasn’t political suicide. The liberal answer is to cut taxes and compliance costs across the board so that other investment areas become more attractive.
This will result in more balanced investment decisions by individuals and business, resulting better economic growth.
Allan Bollard is deliberately trying to beat down a whole economy to correct an aberration caused by heavy handed economic policy in the first place.
The best thing Allan Bollard could do to fix the economy, is close up the Reserve Bank and lobby for lower taxes and a fair go for hard working Kiwis. Let the free market sort it out Mr Bollard. Don’t compound the problem with more intervention.