With a hawkish statement from the Reserve Bank of New Zealand yesterday it is a good time to ask – do we need a preemptive strike against inflation, David Grimmond thinks so (Infometrics link).
This reasoning brings us to the need for the Bank to make an early strike at growing inflation pressures. Given weak New Zealand and world demand conditions, inflation outcomes have remained below 2%pa for more than two years. But there are a number of reasons to be concerned that inflation pressures could quickly mount this year. To begin with, the low inflation outcomes of recent years have been largely a world inflation outcome, with declines in tradable prices offsetting non-tradable inflation that has persistently been above 2%pa. With the period of deflation for tradable goods coming to an end, the headline inflation rate could begin climbing very quickly in 2014.
With inflation expectations also on the rise, it would suggest that a prudent Reserve Bank would seriously consider increasing interest rates sooner rather than later – perhaps less in need of reducing current demand pressures, but rather to strongly signal its continued resolve for maintaining price stability, and pre-empting a build-up of inflation inertia.
Do you agree that, given the rebuild and rising economic momentum the Bank needs to act confidently to maintain its credibility? Or with pricing pressures, and expectations of price pressures, still relatively low would this be jumping the boat in an overzealous attempt to maintain credibility?