28 Apr 2014

CTU wants overhaul of Reserve Bank

6:51 am on 28 April 2014

The Council of Trade Unions is calling for an overhaul of the Reserve Bank, saying it's out of its depth in its ability to control inflation.

Labour wants the Reserve Bank to have a broader economic role.

Labour wants the Reserve Bank to have a broader economic role. Photo: RNZ

The Reserve Bank is now firmly on the rate-rise path, after raising the official cash rate for the second time last week to 3 percent.

Governor Graeme Wheeler said further hikes are needed to control rising inflation, which is being driven by construction booms in Auckland and Christchurch.

That's despite the latest inflation figures coming in lower than expected.

Council of Trade Unions president Helen Kelly said the bank has succumbed to a powerful lobby of commercial banks who want higher rates.

She said there has been a dominant narrative of the fact that inflation is going to increase with very little analysis of the fact that inflation is in fact very low.

Ms Kelly said the inflation is being driven by housing prices and electricity prices.

"We believe a more sophisticated approach to those actually would deliver triple bottom lines - it would keep interest rates low, it would reduce inflation costs, it would allow the productive sector in New Zealand to export and keep the dollar at a reasonable level."

Ms Kelly said it shouldn't just be up to the Reserve Bank to control inflation.

She said it should reassess its options and put more pressure on the Government to deal with some of the issues it should be dealing with at a Government-level.

Ms Kelly said the Reserve Bank should refuse to bow to the campaign by bank economists to drive interest rates up against the interests of the New Zealand economy.

Meanwhile, a poll of 17 economists by Reuters show they believe the Reserve Bank will raise its benchmark interest rate by another 75 basis points this year.

However, they are forecasting the bank to be more cautious next year, with only one 25 basis point hike in the first half of 2015.

NZ 3% rate queried

Meanwhile, one analyst is questioning why New Zealand has the highest official interest rate in the world at 3 percent.

The official Australian rate remains at 2.5 percent and most other countries are still well below 1 percent.

That includes the United States and the euro zone, which are both at 0.25 percent, and the United Kingdom at 0.5 percent.

General Finance executive director James Lockie said he doesn't believe this country's 3 percent official interest rate is justified, especially when unemployment sits at around 6.5 percent, and underlying inflation is so low.

He said New Zealand's rates appear to be much higher than those in Australia, the US or the eurozone, while the New Zealand economy is not doing that much better.

Mr Lockie said concern about house price inflation in New Zealand is driving the Reserve Bank governor in setting the official cash rate.

He said the move in the OCR doesn't do anything to help the unemployment rate or to help exporters who will suffer from a strengthening currency.