He's fighting a losing battle. He's losing it because of a myth, and because of a mis-integration.
The myth is that "inflation" consists of rising prices. It isn't, or at least not exactly. As Milton Friedman was fond of pointing out, “Inflation is always and everywhere a monetary phenomenon” -- or to put it another way, "inflation" is specifically a measure of the expansion of the money supply. This is something of which Alan Bollard seems wholly ignorant -- he's still labouring under the idea that it's rising prices, for which the expansion of the quantity of money is generally the cause.
Inflation (understood in terms of an increase in the quantity of money) enters the economic system in the form of new loans, driving up prices first in those markets in which this credit expansion has taken place.
Ask yourself which market is rising above all others at present? If you answered, "the one Bollard is trying to squelch," then you get the prize.
Now, on to his mis-integration: The thinking, if one can call it that, behind Bollard's raising interest rates is the traditional one that a lowering of interest rates creates a credit expansion (credit becomes cheaper, you see), and by contrast raising interest rates reduces credit expansion. This is considered a general rule of economics, one which Bollard follows assiduously. He is nothing if not a man who follows his textbooks.
He doesn't however appear to have looked around at the New Zealand situation, which is rather different to his textbooks. In the textbooks, credit expansion comes in the main from a large central bank -- in the US, that's 'The Fed.' However here in Godzone, being a rather small (but perfectly formed) country, things are different. In New Zealand, foreign investment has a far greater effect on credit expansion than it does in many other markets: raise New Zealand interest rates above international rates, and you attract a flood of investment -- or to flip that coin, an expansion of credit. Hence the housing boom. New credit and new foreign buyers and investors in the NZ housing market help drive up housing prices -- and each time Bollard whacks up interest rates, he invites more foreign buyers and investors into the NZ market.
But in one hour from now he's going to whack them up anyway.
Bollard doesn't seem to have realised that his own nostrums may have exacerbated the very boom he is trying to squelch -- strangling producers in the process as the interest rates they are paying to expand their businesses go up -- strangling exporters in the process as the New Zealand dollar rises again on the back of the increased foreign investment in New Zealand -- and leaving him looking, not for the first time, like an economic wizard without a wand.
UPDATE 1: The dumbarse has whacked them up, exactly as predicted. Sigh.
UPDATE 2: Here's NBR on the dumbarse and his dumbarse meddling:
Today’s hiking of the Official Cash Rate by a quarter basis point to 7.5 percent will further drive the New Zealand dollar above its fair market value and damage the productive sector of the economy... the chances of the interest rate increase were helped by the [recent] depreciation of the currency: a falling currency stokes inflation though higher import charges, especially for fuels...LINKS: Cue Card Libertarianism: Banking - Not PC
The housing market has been surprisingly resilient, with January sales 19 per cent higher year on year and the median time to sell a house was unchanged at 38 days. The economy is showing signs of accelerating in growth.
The RBNZ has shown some tendency to blame society for its exuberance, but it does not cease its own money creation. M2 has been rowing at about 12 per cent a year for some time, and this is a factor in inflationary expectations and a culture of consumption.
Today’s OCR decision will inflict great damage on the productive economy. The rise in interest rates will depress and discourage demand. It will encourage capital inflows, and a high dollar (which until this month was the “best performing” currency)... This is a structural impediment: it encourages imports and is a disincentive to exports...
New Zealand’s benchmark interest rates are 2 percentage points above the US and 6 per cent more than Japan. The governor is doing his best to make New Zealand the most favoured factor in the Japanese carry trade.
More myths about inflation - Not PC
What Reserve Banks do to our money - Not PC
PLUS CA CHANGE: Questions, rhetorical and otherwise, about Reserve Bank meddling - Not PC (Dec., 2005)
RELATED: Economics, Housing, NZ Politics