The Reserve Bank is tasked by law to preserve price stability. To fight inflation. These two things are not, however, the same thing.
Inflation is a curse; inflation steals wealth; inflation (as Milton Friedman used to point out) is always and everywhere a monetary phenomenon: monetary inflation happens as a result of printing money (and our Reserve Bank has been 'printing' about fifteen percent more each year for the past few years). It's a form of surreptitious theft. That's monetary inflation, which Alan Bollard's bank is exacerbating.
What Alan Bollard is concerned about is not the monetary inflation for which his bank is responsible, but price inflation (or deflation), those price movements either up or down that happen for good market reasons such as supply and demand and the introduction of new technologies and the discovery and extraction of new resources and the like. As I've argued before, removing monetary inflation would be a good thing (but not something in which the Reserve Bank is interested), whereas dampening down the free movement of prices is bad -- it distorts those important price signals which the market needs to function effectively.
Yet Alan Bollard will continue to ignore his own monetary inflation and pursue the illusion of price stability, hiking exchange rates to dampen down free price movements and the results of the inflated money supply and inflated government spending and the strangulation by regulation of land supply, and setting up what economist Steve Hanke calls a "death spiral" in which the higher the exchange rate the more "hot money" from the carry trade is attracted into the country, putting up prices and leading to another hike in prices leading Bollard to hike interest rates and . . .
But here's the irony: in this headlong and destructive pursuit of price stability, there are two prices whose instability is compounded: the price that's paid for the dollar, and the price we pay for money. That's right, the myopia over price stability has led to rampant instability in interest rates and mortgage rates and the exchange rate. The rationalistic "basket of goods" by which price inflation is measure may be made to appear stable, but the prices we actually pay for mortgages, capital and foreign exchange are all over the place.
Do you think there's something wrong with the economic theory on which the Reserve Bank Act is operating?