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Deflation: Another economic headache linked to housing crisis

National’s housing crisis is causing even further damage with the second consecutive quarter of deflation a genuine concern the Reserve Bank can do little about, as it focusses on Auckland house prices, says Labour’s Finance spokesperson Grant Robertson.

“This is a double blow for New Zealand businesses. Prices for their products at home are falling and our dollar is overinflated due to high interest rates, making product prices high and uncompetitive for exporting.

“The Reserve Bank has had to keep the OCR at one of the highest rates in the developed world because it fears pouring petrol on the overheating housing market.

“This has pushed our dollar to overinflated levels, making it much harder for exporters to sell their products overseas.

“Now we have had deflation for two quarters in a row. For short periods deflation is little to worry about but if it sticks around it means businesses are losing money, profits, and inevitably, jobs.

“If businesses struggle to sell overseas and their products prices are dropping at home, the economy will get into real trouble.

“The Reserve Bank would normally be rightly concerned about deflation and consider lowering interest rates. But it will struggle to do that now as any cut in the OCR will add a large dose of fuel to the housing fire.

"This is why the Deputy Governor of the Reserve Bank was so strident in criticism of the Government’s inaction on housing last week. He knows how serious the flow-on effects of the housing crisis are.

“John Key has to take his head out of the sand. It’s time to act,” Grant Robertson says.