Key on official cash rate

John Key on Thursday criticised the increase in the official cash rate, saying Bollard could have waited as some areas of the economy were showign signs of weakness, and an increase was premature.

I actually disagree with John. Having said that, I will note John is infinitely more experienced in matters of interest rates and exchange rates, so I’m not saying I’m right, and he’s wrong. Just that I disagree.

If Bollard had not let inflation previously get above the 3% limit, and sat uncomfortably high for so long, then I would agree that a hike is premature. But Bollard had been in danger of getting a reputation of tolerating inflation, beyond that allowed by his agreement with the Government. After having been slow to act last time, he needed to establish firmly that there is no way he will allow inflation to breach the limit, even if it means unpopular rate increases. A Governor needs to be respected, not popular.

Fran O’Sullivan has a useful column today looking at how far Bollard may go.