Reserve Bank governor Alan Bollard has warned business groups, unions and consumers not to use October's GST hike as a "veil" to lift prices and wages, suggesting doing so will see interest rates rise and the economic recovery slowed down.
In a speech to the Taranaki Chamber of Commerce, Bollard cautioned that price and wage hikes under the "veil" of the pending GST rise would spread inflation and harm the fragile economic recovery underway.
Bollard said price and wage setting behaviour of firms and households would be watched for evidence of indirect and second-round effects on inflation.
"Monetary policy would need to respond if inflation expectations and prices were ratcheted up significantly. The result would be higher interest rates and a dampening of the economic recovery."
Last month Bollard said annual consumer price index (CPI) inflation had been near 2% for the past five quarters.The Reserve Bank is tasked with keeping inflation between 1 and 3% on average over the medium term.
The Reserve Bank has increased the Official Cash Rate by 25 basis points at both its last two reviews, lifting it to 3%. The next review, and Monetary Policy Statement, is due on September 16. GST will be increased to 15% from 12.5% on October 1.
Click here to read Bollard's full speech.
Here's the Reserve Bank's press release:
Given the fragile economic recovery, it is important that firms base their pricing decisions on low underlying inflation, not the upcoming temporary spike, Reserve Bank Governor Alan Bollard said today.
Speaking to the Taranaki Chamber of Commerce, Dr Bollard had a particular message of restraint for those public and private sectors that have a record of increasing prices by more than the rate of economy-wide inflation.
He warned that if businesses, labour groups and households use the upcoming GST increase as a veil to increase margins and wages, they will simply spread inflation and harm the recovery.
Dr Bollard said inflation has been well contained recently, with consumer prices increasing 1.8 percent in the year to June. Although the recovery is certainly not a fast or robust one, underlying inflationary pressures are expected to increase somewhat as the economy moves into its second year of recovery.
“We expect growth to continue, led by exports as household and business spending remains subdued. This outlook and associated policy implications will be reviewed over coming weeks as we prepare the September Monetary Policy Statement.”
As the economy grows, employment levels will increase, and plant and equipment will be worked harder. But consumer price inflation is forecast to remain comfortably inside the target band in the second half of the Bank’s forecast horizon.
“However, the most significant event is the increase in the rate of GST on 1 October. This will push headline inflation substantially higher. Our current expectations of the peak in inflation are around 5 percent. But we expect that spike in inflation to be short-lived, and the inflationary effects should be largely out of the system by later next year.”
Dr Bollard said that while higher headline inflation would pose a challenge for monetary policy, the Bank’s Policy Targets Agreement with Government allows it to “look through” temporary inflation spikes. “The degree to which monetary policy can ‘look through’ temporary inflation spikes depends crucially on the extent to which New Zealanders’ inflation expectations are impacted by such spikes. The price and wage setting behaviour of firms and households will be monitored for evidence of indirect and second-round effects on inflation."
For now, it is assumed that the coming policy changes will have only limited impact on perceptions of future inflation.
“However, there are examples of persistent price increases in sectors such as energy and local authorities that have not suffered persistent cost increases, and these have an inflationary effect. “Monetary policy would need to respond if inflation expectations and prices were ratcheted up significantly. The result would be higher interest rates and a dampening of the economic recovery. We are hopeful this will not need to be the case, so that monetary policy can play as full a part as possible in supporting economic growth.”
21 Comments
"Given the fragile economic recovery, it is important that firms base their pricing decisions on low underlying inflation, not the upcoming temporary spike, Reserve Bank Governor Alan Bollard said today."
Maybe he forgot to look at decling money supply (M3) .. by definition a declining money supply means deflation... what Bollard is on about is "Price Inflation" (not to be confused with actual inflation aka dilution of the currency) .. which of course there is absolutly nothing he can do about except give toothless threats.
well said Matt.................k...rist why do we have him at all..?
And to boot he has indirectly said to the group "we know what your gonna do,...but.. we're watchin you.....that's all....just watchin you.........soooo watch it or.........something..... eh ok fellas..."
AB's nightmare is JG's win in the next Aussie election with the super tax back on the table plus measures to cut spending the AUD will become unstable and lower against all counterparts... It will take more than words to turn it arround... possibly a rate cut before year's end ?
Kindly inform us , Wooly Bully Bolly , just who is meant to suffer the brunt of the GST increase . Are you telling businesses to " suck it up " ? The whole point to GST is to spread the tax burden , to rebalance the tax mix from production , to consumption . I.E. businesses will pass on the cost , down the chain , to the bottom feeders , the consumers .
The price of many goods and services will rise .
"Speaking to the Taranaki Chamber of Commerce, Dr Bollard singled out power companies and local authorities for "persistent price increases".
Power prices have risen close to 5 per cent a year faster than general inflation. The national rates bill has increased an average of more than 6 per cent in the last few years"....stuff.co
You're a wee bit late to the party Bolly....and the councils couldn't give a rat's arse about your warning! Phone Donkey and tell him to pass a law locking council rate increases to the cpi. Go on...phone him.
Bollard's comments about slipping price increases into the GST increase are hardly useful other than to promote the practice among the slower thinkers in the retail world. (Is Bollard the regulator? No.) The warning serves no purpose other than to do what Bernanke has failed to do at the Federal Reserve in America - to create inflation.
With an economy rolling over into deflation, central bankers everywhere are trying to get the consumer to purchase again. In setting a GST increase - three months down the road, our government has attempted to herd the consumer towards the checkout counter before the increase. But any short term surge in consumer spending will be followed by a collapse in retail markets - just in time for the Christmas spending cycle. The bet is that the consumer will still ante up for prezzies after the GST increase.
Everything goes toward my assertion that National will call a snap election very soon. Labour and Act are in dissaray and Key is looking for a straightforward majority before he introduces the shock-doctrine austerity that lays in our future.
"Everything goes toward my assertion that National will call a snap election very soon. Labour and Act are in dissaray and Key is looking for a straightforward majority before he introduces the shock-doctrine austerity that lays in our future".
I think your right about the austerity at some point, NZ will have to eventually take its medicine just like the rest of the world.
Very interesting take on the elections, but I wouldn't have thought Act with their liberal policies would not have presented much of a problem to the National gummit in seeking out that kind of agenda ??. What are your thoughts?
The kind of wholesale change Key wants to make would have to be done quickly, in the hope there is something good to run an election on in 2015. Key hates coalitions. So far, the other parties have been bought off cheap: Act gets the Supercity; Maori get Whanau Ora; and Dunne gets to play minister. The stronger or more significant the other parties get, the bigger the price tag.
In any case, as bad as things are now; they will get a lot worse in the next two years. The stage is being set for yet another liquidity/credit crisis. There are too many impediments to the Blue team (National) running off to Wall/Washington to participate in swaps with the NYFed. First of all, some kind of audit of the Federal Reserve will happen next year. That audit will reveal massive lending to countries like NZ. The Tea Party crowd will shake up Washington enough after the mid-terms to force Americans to focus on domestic problems.
One or two potential blowups in Europe will freeze interbank lending and send rates significantly higher. Because most of our national debt is short term, this will mean lending rates here will accelerate greatly - every 90 days or so. The elimination of our welfare and health system will be among the first institutions to go. Key has made no secret of giving ACC to the private sector. How much further can our DHB's be behind that curve?
The other decision that will have to be made is to raise superannuation in this country to aged 70. This kicks the baby boomer bill down the road and gives him time to unveil a compulsory employee/employer payment towards super.
Those are the main points. Key will call an election for the same reason Gilliard called an election 3 weeks after becoming PM: The coming second wave of economic disaster is coming faster than anyone thought. Key is chomping at the bit to do the dirty now... if he loses, all fault will rest on Labour who will be holding the tiller when it hits. That leaves him lots of time to take his $50 million and turn it into some real money.
Want to know about where we are going?
http://www.marketoracle.co.uk/Article22011.html
".. To start with, once the U.S. government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it's criminal to make indentured servants out of people who aren't even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.
The debt will be defaulted on one way or another. The trouble is they're almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That's because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of dollars, they're going to wipe them out financially.
It's just horrible. Runaway inflation will reward the profligates who are in debt—people who've been living above their means. And punish the producers who've been saving and trying to build capital. That's in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were."
You need bum paper Elley...not a boat or trinkets. I advise avoiding debt...building a store of needed stuff but within reason...running the chooks and telling the sprogs they are not allowed to have their own veg garden!...buying shares in a working gold mine if you have the spare loot. You might also consider a .22 for the older sprogs all within the law of Noddyland.....yesterday I counted two nice fat hares within 200m of the house. The Rabbits are everywhere down here.
OK, I admit that I need bum paper lol. But you realise that it's cheap and bulky, do you? I suppose it's fine if one has just $500 to spend before cash becomes virtually worthless (if that's going to happen, and I hope it isn't) but for larger sums it's not solving the problem.
Re gold mine shares, hubby has had a fascination with gold since the GFC started but looking at charts etc for the past 20 years or so it didn't look like a good return was likely to me. Of course now he's lamenting that he should indeed have invested in gold two years ago...oops. Seems a bit late now, although maybe not.
Out of interest, if you truly believe that we are heading towards hyper-inflation, when do you reckon it will happen (not asking for a specific date, rather within weeks, months or years)?
Them American Indians had it down as 2012...maybe they had their very own Nostrawhatsit bloke.
That's the best I can do Elley. Between now and then, expect bubble and trouble everywhere. Best Gold option is to buy a good detector for hubby...call it 'Poochi'...and send him south to any of the 16 sites where it's free...yes it's FREE. No govt fees...no charges....no taxes...and probably no gold but hey who cares about that!
Nothing wrong with the chocolate Elley...as long as it's pure!...otherwise it goes off. Needs careful storage to protect it from little fingers.
The dunny paper bought in bulk, not that coloured scented rubbish, can save you a heap if you work it out. Also doubles as insulation.
Not that long ago the 'Elleys' of this world produced a room full of jam and preserved fruit every summer, while the blokes went fishing. We have to return to those days.
"Not that long ago the 'Elleys' of this world produced a room full of jam and preserved fruit every summer, while the blokes went fishing. We have to return to those days." - My husband would completely agree with you on that one.
We planted our first fruit tree last week btw, a French Sugar (had to be really!), and another 20 or so followed. Trouble is, I'll have to give them a couple of years at least before I can make all this jam. Gotta say, we're happy to have left the city and to have a bit of land. It kind of gives us more options.
The ---- is about to hit the fan big time baby!
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