The US Federal Reserve has once again cut the federal funds rate, to just 2.0%. Despite soaring energy and food prices, the Board acted to stimulate the economy by making credit more accessible. The Fed believes there will be a flattening out in energy prices in particular in the coming months, reducing the impact of that component on overall inflation.

And despite all the scare-mongering about how the US is in recession, March GDP figures suggest things are not quite as bad as some would have us believe. The economy grew by 0.6 percent on an annualized basis in the March quarter. Not enough growth to be excited about, but growth nevertheless. Could it be that the timely, and at times drastic, measures the Fed has taken since August last year have helped avert a total meltdown of the US economy? At this stage it would be too early to suggest that a recession there has been avoided. It may just have been delayed. But the Fed must surely take some of the credit for the fact that the US economy has managed to eke out another quarter of GDP growth in its current environment of continued doom and gloom news.

What does all this mean for us here in New Zealand?   First, there is now a 6.25% disparity between US rates and our own. The NZ$ is up again against the greenback today on the news of the US rates cut. Expect more speculative investment to enter New Zealand, offset only by greater overseas caution about investing in a foreign market, and about investing in a country with a wildly overvalued currency.

Second, the Fed has realized that although inflation is going to be an issue for the next few months, there is not much they can do to stop it. Raising interest rates is out of the question, whether for economic (hopefully) or political (possibly) reasons, considering the negative environment the economy finds itself in. At least our Reserve Bank seems to have realized the pointlessness of raising rates to combat the latest cycle of inflation, the cause of which is off-shore. The Bank has not raised rates despite a March CPI figure of 3.4%. But where the Fed goes further is that it has acted preemptively to cushion the slowdown already happening in the US.

We probably don’t need reminding that the chief objective of our Reserve Bank is “to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices,” according to the Reserve Bank of New Zealand Act. But the Policy Targets Agreement, which sets the desired inflation rate boundaries at 1% to 3%, acknowledges that in certain circumstances, such as international shifts in commodity prices, it may be difficult to keep inflation within the target range.

Surely this is such a case. The Agreement says that in such cases, “the Bank will respond consistent with meeting its medium-term target.” The Agreement also states that the setting of inflation targets is to support “the objective of the Government's economic policy” which is “to promote sustainable and balanced economic development in order to create full employment, higher real incomes and a more equitable distribution of incomes.” One wonders how maintaining interest rates at current levels achieves any of these government objectives.

The greatest irony of all, perhaps, is the 24 April official cash rate media release comment from the Bank, which points to a high exchange rate crippling exports. Is it not the extreme interest rates the Bank has put in place that are stunting New Zealand’s economic development by hindering business investment in more competitive technologies and by inflating our exchange rate?

Couple all this with the slowdown in the housing market, which last year seemed to be the only facet of inflation the Bank was interested in, and it leaves one asking, “C’mon, Dr Bollard, when’s it our turn for a rates cut?”