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Interest rates, inflation-home thoughts from abroad


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Earlier today the RBNZ lowered the OCR. Whilst seeming to meet with approval by some, see this item on bank economists’ reaction at NBR, it was not greeted so enthusiastically by others including Bernard Hickey at Show me the Money and The Visible Hand in Economics, nor by this blogger. Though a number of others have welcomed the cut.

Whilst working on a post on other aspects of the implications of the OCR cut, from Adam’s perspective – to appear later, he recalled a recent article in The Economist of 12th July which he thought might be worth drawing people’s attention too.

This article is entitledThe ghost at the till:-

Bitter experience has made Latin Americans intolerant of inflation. But have their policymakers banished this spectre?

Bitter experience has made Latin Americans intolerant of inflation. But have their policymakers banished this spectre?

The article concludes:-

The test will be whether or not inflation is heading down by the end of this year. If it is not, more drastic action will be required, which might make a big dent in economic growth. The wiser among the region’s politicians know that, costly though it may be, the fight against inflation is one they cannot afford to lose. Already, price rises threaten to tip several million Latin Americans back into poverty. Brazil’s president, Luiz Inácio Lula da Silva, though a man of the left, has given strong backing to the Central Bank’s bitter medicine. Inflation is a “degrading disease”, he says. It is a malady that long debilitated Latin America. That is why the region is relatively intolerant of it now.

What struck Adam as he re-read the item were some of the parallels that appear to exist between some of the countries cited and New Zealand.

One paragraph Adam found especially interesting was this one:-

The regional average inflation rate rose to 7.5% in April, from 5.2% a year before, according to the IMF. This is an underestimate, since Argentina’s official inflation figure of 9.1% is probably less than half the true rate. It also conceals a divide. Around the turn of the decade, several of the larger countries adopted floating exchange rates, and inflation targets administered by more-or-less independent central banks. Another group of countries—including Argentina and Venezuela—have given greater priority to growth than to price stability. But even among the first group, inflation has been rising. In response, central banks in Chile, Colombia, Mexico and Peru began to raise interest rates last year. Even so, they have missed their inflation targets, in most cases for the first time (see chart).

Sound familiar in any respect? Now the parallels are not exact, but they do provide food for thought. Indeed, given the desire by some politicians – such as Trevor Mallard and Winston Peters to move towards a more growth centric model and away from an inflation targetting model, the experiences of this group of countries should perhaps be looked at to see if there are any lessons to be learned.

These following comments on Brazil were interesting also:-

To howls of protest, Brazil’s Central Bank halted three years of monetary easing last October. Since then it has raised rates by a percentage point. Even so, inflation is nearing the upper limit of the target of 4.5% plus-or-minus two percentage points. Two things that have helped to contain price rises in Brazil for the past few years—cheap goods from the rest of the world and a strengthening currency to buy them with—have now run their course, notes Marcelo Carvalho of Morgan Stanley, an investment bank.

After initially grumbling that higher rates were making the real too strong for Brazilian industries to compete, the finance ministry is now supporting the bank’s efforts. In June it tightened fiscal policy, raising its target for the primary surplus (ie, before debt payments) from 3.8% of GDP to 4.3%. The authorities are optimistic that inflation will be falling by the end of the year. But ordinary Brazilians are alarmed by the rise in the cost of a staple basket of food—up by as much as 50% in some parts of the country, according to DIEESE, a union-linked research body.

So, perhaps we should draw upon the lessons learned in Latin America, whilst not forgetting those we should be remembering from our own relatively recent past as well. Collective memory of past problems is sometimes a good thing.

Adam wonders also how in sync the RBNZ and Treasury really are? Perhaps the sync is more between some elements in the RBNZ and Cullen’s office, as Treasury seems to have very quiescent in recent times on a number of the decisions taken.

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