Bernanke could learn from his New Zealand counterpart
July 31, 2006
 By William Pesek
It's doubtful the name Alan Bollard gets mentioned much in Washington. After all, New Zealand's central bank governor oversees an economy small enough to seem like a rounding error to officials at the US Federal Reserve.
Yet from his office overlooking the Wellington skyline, Bollard is conducting one of the most intriguing monetary experiments of our day: learning to live with inflation.
That's not the popular perception of the Reserve Bank of New Zealand. In the world of monetary thought, it is considered a hawk.
Its mandate is targeting low inflation, even at the expense of growth. Bollard's predecessor, Don Brash, steered the $109 billion (R750 billion) economy into recession three times in 14 years.
It was quite a novelty, then, to see Bollard leaving interest rates unchanged last Thursday amid accelerating prices in the Asia-Pacific region's 13th-biggest economy.
Inflation reached 4 percent, well above the targeted ceiling, in the year to June and Bollard said it was likely to persist near that for "several quarters".
In other words, even though high inflation will be around for a while, interest rates are staying put.
"The Reserve Bank just doesn't want to raise its cash rate unless Armageddon threatens," said Stephen Toplis, the head of research at Bank of New Zealand in Wellington.
Is Bollard becoming insubordinate? A central banker's job is to tame prices so that the economy can fulfil its potential. Is New Zealand dropping the ball? No, but Bollard seems on the cutting edge of a new reality in global economics.
Perhaps it's fitting that the nation that starts the developed world's day is starting its next inflation battle. And while Fed chairman Ben Bernanke and the world's big policy makers don't often pay attention to New Zealand, they would be wise to follow Bollard's progress.
It can be argued Bollard is going out on a limb, essentially admitting that inflation pressures are coming from things central bankers can't really control - like oil prices. Only time will tell if he's a maverick who should be followed or ridiculed.
Yet Bollard's dilemma has relevance for central bankers around the globe. His choice is between driving the economy into recession or trying to shepherd the nation of 4 million through an inflation scare that could last for some time.
Since Bollard has already raised the benchmark interest rate to 7.25 percent - the highest level in more than seven years - and inflation in the country is well above the central bank's mandated target range of 1 percent to 3 percent, he seems to be leaning toward the latter.
Relaxed central bank policies are among the forces driving up energy prices. Yet there is little that interest rates can do to offset the geopolitical risks pushing crude oil higher. Those increases will continue feeding into the cost of everything from food and travel to clothing and electronics.
It may just be that governments, investors and consumers alike will have to adjust to accelerating inflation. That's especially true now that some deflationary pressures are waning. Chief among them is a fast-growing Chinese economy that will increasingly experience higher wages and production costs.
Can it really be said that the spike in oil is transitory? No, when you consider Asia's rapid growth and how its thirst for energy may only increase exponentially.
Barring the discovery of vast new oil fields, crude costs may continue rising.
However things turn out in Wellington, the world's monetary officials should be keeping an eye on events there. - Bloomberg
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