Treasury's best course would do National nicely

VERNON SMALL
Last updated 10:35 28/07/2011

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OPINION: Alan Bollard is not, by all accounts, barking mad. Which is why the Reserve Bank is unlikely to hike interest rates today. He is, at last check, sensible enough not to get too hawkish about the prospects for monetary policy tightening in the current environment.

The dollar is at record highs against the greenback, and central banks around the world are concerned about global growth. Some – including Australia – are even looking at rate cuts. The US is in the grip of a Mexican debt standoff and the European sovereign debt crisis is still in the wings.

Against that backdrop – and with commodity prices weakening – it would be irresponsible for Dr Bollard to talk too strongly about the prospects of an early tightening cycle (although some easing of the current highly supportive rates is inevitable in the next year).

Much more likely, you would hope, that the good doctor and his team will give the US crisis a chance to resolve in a benign way, check the next set of unemployment data and give the economic green shoots a chance to flourish before becoming too frosty on interest rates.

(Geek alert: If you want to scare yourself silly about the US debt crisis, check out the numbers that are spinning at usdebtclock.org/index.html.)

True, the markets were surprised by the 0.8 per cent growth rate in the March quarter, but in relative terms that is hardly a sign the economy is going gangbusters. True too (as yesterday's National Bank survey confirmed), businesses are perky, with a net 48 per cent of them expecting better times for the economy in the next 12 months.

But pushing up rates in the near term, or being too definitive about an early tightening cycle, would serve only to give the dollar another nudge in the wrong direction for exporters.

Those who remember the late (and unlamented) monetary conditions index will recall just how influential a high currency can be on keeping inflation in check.

As financial risk management expert Roger J Kerr has suggested, Dr Bollard would be best advised to issue a non-committal statement that does not signal a tightening before December, to buy time until the currency settles down. It will be time enough when the dollar heads south for the bank to move.

That will also sit well with National. It is hardly under threat in the polls but the Government will rest that much more easily if interest rates are not pushed up aggressively before November's election – given one of Labour's main attack points is the cost of living.

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At the moment, however, National is riding high with almost three times as many voters believing it has the best plan to fix the economy according to today's Fairfax Media-Research International poll. Even Labour's biggest bogyman – the partial sales of the three state-owned electricity "gentailers", coal producer Solid Energy and the selldown of Air NZ shares – has failed to shift sentiment towards Labour.

With such a lead, there is no pressure on Finance Minister Bill English to rock the economic boat. He is expected to fill in some of the details of how the asset sales will be structured, in particular how he will deal with the most politically charged issue: how to ensure NZ investors get priority.

With a $7 billion to $10b privatisation programme spread over seven years, the Government will be pushing between $1b and $1.5b of assets into the market in any year.

That should be easy for the local market to digest, without the need to sell shares overseas.

The various Government agencies, including ACC and the Cullen superannuation fund, will be keen buyers, as will iwi and KiwiSaver funds, not to mention the huge pool of funds sitting in bank deposits.

It will be a real coup for National, and a blow to Labour, if the Government can point to a near 100 per cent uptake by local institutions and investors.

Ensuring the assets stay in the country post-sale, if that is the intention, is a more difficult task.

- The Dominion Post

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