By Alex Tarrant
Outgoing Reserve Bank Governor Alan Bollard better not throw incoming Graeme Wheeler an inflation-ridden hospital pass in September, BNZ economist Craig Ebert says.
That was exactly what former US Federal Reserve Chairman Alan Greenspan threw Ben Bernanke in 2006 after keeping interest rates too low for too long, and advocating for deregulation of the financial sector during his two decades heading the Fed.
BNZ economists reckon inflationary pressures in the New Zealand economy are emerging not just in Canterbury and the housing market, but right across the economy.
And people seemed to have short memories about the 2002-2007 house price price boom, Ebert said. While the Reserve Bank has accepted in hindsight it had been too slow to raise interest rates in the early stages of that boom to cool the housing market, "we can see the same things happening again," he said.
BNZ and other bank economists are pencilling in the next move in the Official Cash Rate will be an increase of 25 basis points to 2.75% in March 2013. Global economic developments would be key to this assumption, with the risk of a meltdown in the Eurozone still a possibility.
But given that did not happen, Wheeler, who takes up residency at the Reserve Bank on September 26, would likely have to raise rates pretty soon into his tenure. Ebert said Bollard needed to leave Wheeler with the view the economy was "inflationary and imbalanced."
“We hope he is conscious of the inflation risk ahead. Which we think is there," Ebert told interest.co.nz.
The Reserve Bank had talked recently about the fact it under appreciated the demand equation in the economy in the early stages of last decade's boom. It had thought the economy was meandering along, "when in fact there was a massive amount of excessive demand, because they’d basically been too generous on their supply assumptions," Ebert said.
“We can see the same things happening again," he said.
Those pressures were fundamentally across the whole economy.
“What we’ve got is an economy that is getting hot in Canterbury, but the other parts are ticking over relatively well. You cannot interpret [yesterday's NZIER Quarterly Survey of Business Opinion] numbers as saying Christchurch is the only thing growing in the economy. That’s incorrect," Ebert said.
“It’s just that [the different parts of the economy] are running at different speeds. A little bit like Australia in a way, but they’re all growing – that’s the part to be conscious of," he said.
While BNZ was not forecasting strong growth over the coming years, “what we’re saying is, it won’t take much growth to put the [inflationary] pressure on the economy.”
“We don’t have as much supply to afford it. It would be great if we could grow at four or five percent, but the fact is, if we tried to do that, demand would soon just put massive pressure on limited supply, it would all spill over into inflation, and interest rates would have to go up aggressively," Ebert said.
"We don’t want somebody to hand the baton over with this view that everything’s real soft and soggy, inflation’s not going to be a problem, and we should keep the OCR where it is at 50-year lows forever, on this threat that the global economy’s going to blow up," he said.
“It may do, and we’re all worried about that but, what if it doesn’t? You do have to ask the question: If it doesn’t blow-up, where’s that housing market going to go, for example?
Yesterday's REINZ median house price and stratified price index, which hit new highs in June, "vaulted the bubble levels of a few years ago, and no-one’s blinking an eye."
“People seem to have short memories," Ebert said.