Sludge Report #178: Let The Squealing Begin

Thursday, 26 July 2007, 9:59 am
Column: C.D. Sludge

Around 8.16 am this morning the sound system in the Reserve Bank's media room malfunctioned. A roaring noise from outside on the road could be heard and a Radio New Zealand wit expressed the view that it must be the bank's money dragon roaring. *

By then we were all locked in with the knowledge that Dr Bollard has raised the Official Cash interest Rate by a further quarter of a percent to 8.25%.

And so as a loud bellowing dragon like noise came in from outside, no communication was allowed out from inside to prevent the commercially valuable information that New Zealand's dollar is likely to continue to rise (or at least not fall) today.

Though it was almost universally expected this morning's news that the OCR is rising again is likely to increase upwards pressure on the dollar – at least in the short term – as it increases the yield to foreign investors from NZ's already stellar currency even further.

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Where Reserve Bank Governor Alan Bollard Might Have Spoken This Morning – But Didn't Scoop Image

Meanwhile Dr Bollard's one page statement, delivered with the customary coffee, fruit and sausage rolls, was remarkably upbeat and should give dollar purchasers no concern.

Whereas there was perhaps some signs of trepidation at the last rate rise in June this time the Bank is assured that there is no evidence of it having taken a step too far.

"The New Zealand economy is running strong. We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products."

Yesterday Fonterra – New Zealand's largest exporter - expressed upbeat views on the likely path of returns in the Diary industry in the 2008 year. Whilst not actually raising the forecast payout they did indicate that there is a possibility that they may do so later in the year.

Dr Bollard continued (in print – according to RBNZ spin-master Mike Hannah there will be no interviews with the Governor today):

"This is very good news for New Zealand. Given this positive situation some of the negative commentary circulating about the economy is unwarranted."

That would include this commentator who felt that there was a risk that the sharpness of the rise in interest rates that occurred in May-June might result in a sharper than expected shock to the New Zealand economy.

"However, the continued tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today."

I.E. pain now is in everybody's interests to prevent him having to raise rates even higher later. At least that’s the theory.

On the Dollar:

"The New Zealand dollar has reached very high levels recently, driven by US Dollar weakness and New Zealanders' heavy demand for borrowing."

Noticeably he does not mention high interest rates (and the widening margin between the NZ dollar yield and its trading partners) as a cause for the rising dollar, even though that is one of the principal causes. Since June the New Zealand dollar has risen not only against the weak US Dollar but against all our other trading partners as well including Australia where interest rates are now 2 full points lower than they are here.

"This level of currency has been hurting exports. The high New Zealand dollar is not sustainable medium term and investors should understand this. The higher OCR how gives strong incentives to New Zealanders to save.

"New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation".

Phew! So this could be the end of rate rises?

Yes. But.

There is a qualification there. "Provided" New Zealanders moderate their borrowing - I.E. provided our housing market responds – then there is relief in site.

And as we all know that’s a definite maybe.

The Reserve Bank has a long and proud history of punting on house price moderation that never eventuates. Or at least has not done so yet.

Consequently there will not be a lot of confidence expressed in either the Reserve Bank or Monetary Policy in general today.

While dairy farmers and forest owners are relatively happy. The apple industry looks likely to take a huge bath. The fishing industry is also decidedly unhappy with the state of the NZ Dollar.

Tourism operators have not yet started squealing, but if I were an American back-packer New Zealand dollars at 81+ cents a piece look increasingly unattractive.

What remains of New Zealand's manufactured goods base must be teetering, and recent positive developments like the recently announced Air New Zealand maintenance contract with a Hawaiian carrier must be being looked at closely in light of the continued remarkable strength of the currency.

And so expect today to be a day of complaints and ideas, of economics experts suggesting alternative solutions and of suffering industries and their political representatives demanding a new look be made at Monetary Policy setting.

Just don't expect to see Dr Bollard on a screen near you today explaining his actions.

As far as the bank is concerned. Mum's the word.

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Morning commuters remain blissfully unaware of the loud noise blast from the "Money Dragon" emanating from Richard Naylor's R2.co.nz video van parked across the road from the Reserve Bank - " Scoop Image

* P.S. It later transpired that that the loud noise from outside was coming from R2.co.nz's radio microphone where Richard Naylor was preparing for Scoop's historic live Internet Video Cross, broadcast from outside the bank broadcast this morning moments after 9am and viewable at the top of this page.

Email users click here to view video:

http://www.scoop.co.nz/stories/HL0707/S00359.htm

Anti©opyright 2007

© Scoop Media

Alastair Thompson

Scoop Publisher

Alastair Thompson is the co-founder of Scoop. He is of Scottish and Irish extraction and from Wellington, New Zealand. Alastair has 24 years experience in the media, at the Dominion, National Business Review, North & South magazine, Straight Furrow newspaper and online since 1997. He is the winner of several journalism awards for business and investigative work.

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