Key against looser inflation target

PM Key says RBNZ's 1-3% inflation target 'at the right place'; Does not want to see the Bank given more room to move on inflation front

Property

PM Key says RBNZ's 1-3% inflation target 'at the right place'; Does not want to see the Bank given more room to move on inflation front

31st Jan 12, 5:33pm by Alex Tarrant

By Alex Tarrant

Prime Minister John Key is not keen to give the Reserve Bank any more room on the inflation front, saying the central bank's 1-3% target band for is at the right place and that it is a "fool's paradise" to think higher inflation would lead to more prosperity.

The government was not looking to make any changes to the way monetary policy was managed in New Zealand, Key told media in Wellington a day after current Reserve Bank governor Alan Bollard announced he would step down from the position on September 25 after 10 years in the job.

Key congratulated Bollard on doing a "great job" at the helm of the Bank, saying he had been a "very good governor" who had applied the Reserve Bank Act with "great acumen".

Key said there had not yet been any discussion on whether the Reserve Bank might move from a model where the governor alone set the Official Cash Rate, to one where a monetary policy committee voted on the level of the OCR.

"I don’t see tremendous change to the way monetary policy is managed in New Zealand. I think for the most part we have world’s best practice, and it’s served us pretty well. Again, it’s not perfect, but it’s the best system that we can see, and it’s actually consistent with what most other countries do," Key told media at his post-Cabinet press conference in Wellington.

Key said he had not had any discussions with English about possible changes to the next policy targets agreement with the Reserve Bank, although he could not rule out there may be alterations at the margins.

They had talked generally about monetary policy in the lead up to the election however.

“For the most part we’re very comfortable it’s working well,” he said.

Meanwhile, Key did not want the Reserve Bank to be given more room on the inflation front by raising the target band.

“In the end, inflation undermines the values and the wealth of those that are on fixed incomes. It’s a fool’s paradise to think that you can have more inflation [and] we’re all going to get richer. Actually, if you’re on a fixed income, you’re all going to get poorer,” he said.

“I think the one to three per cent band’s about right. Having capacity for more inflation just eats away at the retirement savings of New Zealanders, it encourages the wrong behavior, and I can’t see a rationale for it."

(Updates with video)

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6 Comments

by skudiv | 31st Jan 12, 8:11pm 1327993917

“In the end, inflation undermines the values and the wealth of those that are on fixed incomes. It’s a fool’s paradise to think that you can have more inflation [and] we’re all going to get richer. Actually, if you’re on a fixed income, you’re all going to get poorer,” he said.

Who is this fool who decided inflation was a good idea? He probably paid a low price for his paradise, and is laughing all the way to the bank with his "capital gains".

by PhilBest | 1st Feb 12, 12:30pm 1328052619

Of course "capital gains" that are the same as the rate of CPI inflation are not capital gains at all.

When there ARE capital gains ahead of the rate of inflation, there needs to be some "exclusivity" of supply of the item involved.

200 odd US cities never have much in the way of REAL capital gains on property, because of "freedom to build" at and beyond the urban fringe. The raw land price is normal farmland price - under $10,000 per acre. And this is because there is no limiting and rationing of where anyone can develop. There is simply SO MUCH land within a k or 2 of the urban fringe that it is not worth anyone's while trying to "corner" the supply.

by Wolly | 1st Feb 12, 8:48am 1328039318

Three years ago Key said inflation would help erradicate the debt mountain....doh

Nobody believes the BS any more....we are back to gambling on property using cheap bank credit with the full support of the RBNZ guided by the govt directed by the banks....aaarrrrrrrrrrrrrhahahaaaahaaaaa

by PhilBest | 1st Feb 12, 12:20pm 1328052031

Abolish urban growth constraints and grant "freedom to build". That will take care of house prices. AND loosen monetary policy targets to allow a brief period of high inflation to wipe out house price inflation in REAL terms without leaving people in negative equity in dollar terms. Something like this happened in the 1970's. House prices spiked due to stupid Kirk Govt policies easing credit but not freeing up housing supply. Then there was a few years of high inflation under which house prices did not inflate as fast as incomes and prices of goods, eventually resuming the historically "3X" normal relationship with incomes. I learnt this from Rodney Dickens - he called it "washing away our housing bubble sins in a tide of inflation". I think it is the best idea I have heard yet for dealing with the aftermath of an insane regulatory-induced bubble. Provided growth constraints are abolished so that the monetary easing does NOT just keep pumping the bubble bigger.

by powerdownkiwi | 1st Feb 12, 12:35pm 1328052938

Most readers here will be slightly wider in their thinking. They might even ask what those houses will be made of, transported by, serviced by, maintained by, and inhabited by.

They might ask where the food for the folk in those unlimitedly-growing houses is going to come from, what it relies on for fertiliser, cultivation, transport, and where it will happen.

The bubble you refer to, wouldn't of course, have anything to do with the growth you advocate, would it? Nothing to do with the need of a growth-based fiscal system attempting yet one-more doubling whilst expecting physical resources to underwrite it?

Of course, silly me. The more we extract something, the more there is. The more we build, the more space we'll have each. Begs the question: By your reckoning, you shouldn't need any extra land, you should be able to expand exponentially and forever on a single quarter acre.

The fact that you can't, disproves your myopic bleat. It's just a matter of scale, from your quarterr-acre inability, to a global one.

by PhilBest | 1st Feb 12, 4:03pm 1328065407

Piss off and leave the finance and economics issues to people who have got two brain cells to rub together on finance and economics issues, Powerdowngoebbels.

For the zillionth time, resilience to resource runout is NOT enhanced by anticipating free market price increases with Eco Taleban "indulgences" charged to young people who simply had the temerity to be BORN.

Meanwhile, just as with the medieval papal indulgences, there is a class that benefits handsomely from this non-reason religious based racket.

I suspect that you have a land bank waiting for the urban growth boundary to be extended, and you are desperately thrashing around making every religious-based bullshit excuse under the sun to protect the fact capital gains you have got lined up. Just like the medieval papal high priesthood with the rackets they ran.