Bayly Andrew: Oral Questions — Questions to MinistersText is incorporated into the Bound VolumeBayly Andrew: Oral Questions — Questions to Ministers[Sitting date: 29 October 2014. Volume:701;Page:334. Text is incorporated into the Bound Volume.]2.ANDREW BAYLY (National—Hunua)to the Minister of Finance: What reports has he received on recent trends in consumer price inflation?Hon BILL ENGLISH (Minister of Finance):Last week we had the most recent CPI release. This showed that the cost of living increased by 0.3 percent in the 3 months to 30 September and the cost of living increased by 1 percent in the year to September down from 1.6 percent in the year to June. This 1 percent annual inflation is less than half of the 2.7 percent increase in average ordinary time weekly earnings in the year to June so on average wages are rising more than twice as much as the cost of living. Inflation is now below the 2 percent mid-point of the Reserve Bank target range. This means there is generally less pressure on household and business budgets and less pressure on increases in interest rates.Andrew Bayly: How does New Zealand’s inflation rate compare with other developed countries?Hon BILL ENGLISH: We are in about the middle of the pack bearing in mind that there are quite a lot of developed countries around the world facing the prospect of deflation. In the United Kingdom inflation in the year to September was 1.5 percent in the US it was 1.8 percent Canada was 2.1 percent and Australia was 2.3 percent. They are all comparable with New Zealand’s rate of 1 percent. Price stability through sound fiscal and monetary policy is supporting investment and the growth outlook for New Zealand for real increases in incomes and more jobs. Since 2008 inflation has averaged 2.1 percent per year.Andrew Bayly: What impact is the lower than expected inflation likely to have on the economy over the next year or 2?Hon BILL ENGLISH: There will be an update of at least Treasury’s view on that at the half-year fiscal update on 16 December. Economists in general are predicting lower inflation to continue and this could reduce the size of future interest rate increases. Low inflation will also help support continued good conditions for business investment in the creation of new jobs. It will also allow for ongoing real wage increases and help households keep on top of their debt. On balance low inflation is good for New Zealand and good for the prospects of sustained reasonable levels of growth.Rt Hon Winston Peters: If all that is correct why has the Reserve Bank Governor been starting at shadows and hiking up interest rates all year?Hon BILL ENGLISH: That is a matter for the governor and I am sure he will have more comments to make in the next week or so. As with most economic policies it is always easy to see in hindsight where the judgments could have been made differently. In this case the prospects for the New Zealand economy are reasonably good and it may be that we avoid the excesses of the last cycle which that member was party to where first mortgage rates reached 10 percent and inflation reached 5 percent. We are certainly not going there again.Andrew Bayly: How could the lower inflation outlook impact on the nominal economy and by implication on the Government’s own finances?Hon BILL ENGLISH: As I have said detailed forecasts will be set out in the half-year update. However lower inflation could dampen consumer spending and the size of nominal wage increases although wages are likely to continue rising faster than inflation. While real annual GDP growth has been strong at almost 4 percent unusually nominal GDP growth which has the largest impact on Government revenue has been increasing more slowly. It is a very unusual set of circumstances. These trends could have a further knock-on effect on the Government’s books by impacting on the amount of income tax and GST that the Government receives. There have been some signs of this already over the past year. There will be an update on it on 16 December.Rt Hon Winston Peters: Is that answer shorthand for there is no surplus?Hon BILL ENGLISH: The impact of the smaller nominal economy on the Government’s books is yet to be seen.Dr David Clark: Even if the Minister admits he has no new ideas himself will he accept that monetary policy is broken and out of date given that inflation is nearly falling below the 1 percent bottom end of the policy targets agreement band and yet the Reserve Bank Governor has been forced to raise interest rates because of his Government’s failure on housing?Hon BILL ENGLISH: I have got one new idea: maybe Labour should try another leader. That seems to be a new idea that it has regularly—the only new idea that it has. In fact Government policy has assisted the Reserve Bank in keeping interest rates lower because we have stuck to pretty tight expenditure growth of around $1 billion a year. As the Reserve Bank has made pretty clear one thing that would put pressure on higher interest rates would be Government spending running out of control and it is not. So there is a prospect now that households that were concerned that interest rates would continue to increase consistently may find that interest rates do not increase quite as much. They will certainly avoid the excesses of the last cycle under the Labour Government when first mortgage interest rates reached over 10 percent.Dr David Clark: When the Governor of the Reserve Bank has had to raise interest rates due to his Government’s failure on housing why is his Government content to see exporters punished with an overvalued exchange rate which Treasury says will lead to exports to GDP in 2016 being at their lowest level since Robert Muldoon became Prime Minister—the worst result in 40 years?Hon BILL ENGLISH: I think we can take a gauge from the fact that the Labour Party is saying there is an export crisis which probably means exports are really taking off. In fact there is some evidence that that is the case. The exchange rate has settled back a bit to under US80c. That will assist our exporters who by the way have done a great job over the last 4 or 5 years increasing their productivity and their resilience. And if it is likely that interest rates will not go as high as expected that will also assist our exporters.