Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

Sludge Report #184: When Money Bites

Sludge Report #184: When Money Bites


By C.D. Sludge


Click for big version

Reserve Bank Governor Alan Bollard explains today's MPS to media.

Listen To The Governor's Press Conference
Press Play To Start Audio Playing….






DOWNLOAD MP3

Ouch. Today's monetary policy announcement from the Reserve Bank makes for some somber reflection. Ugly graphs. Positive outlook. Very difficult decision.

The headlines are
- interest rates are coming down faster than expected - 50 basis points today, more to come;
- the economy is believed to be in a mild recession for the first three quarters of 2008;
- and, that the economy is forecasted to bounce out in the final quarter of calendar 2008.

However.

The graphs are ugly ugly ugly (inflation in particular - and producer price inflation specifically) and the Bank's assessment of the global economic weather ahead is nasty.

While the US economy is not in recession (its banks are being nationalised, housing market is imploding but it is growing) - the global economic outlook has deteriorated faster than expected.

It is perhaps a fairly spectacular reflection on the health of the agricultural export sector, and NZ's Government fiscal health that the bank is plotting what it thinks will be a safe course through the storm ahead.

Dairy returns, tax cuts and interest rate falls are collectively expected to bring us out into the sun on the other side.

And so that is what the Bank is doing, plotting a steady course and hoping for the best. Today's is essentially another steady as we go statement from the Reserve Bank.

The bank is forecasting ongoing official and 90 day interest rate falls - as signaled in July when interest rates were cut for the first time in five years - but this time steeper and faster.

However it is nevertheless also expecting effective mortgage rates to continue to rise for several months more - as a result of the lag between interest rate cuts and the maturity of fixed mortgage replacement.

Notably the Bank's data shows that although fixed rates have started to fall, floating rates offered to new borrowers have continued to rise since July.

The bank describes the effect of this as "contractionary".

What it means is that your wallets are continuing to be squeezed - intentionally - in order to discourage inflation.


Click for big version

In ordinary circumstances the bank might have been inclined to cut rates much faster than they are given the state of the housing market and the outlook for business investment.

However at present CPI inflation is forecast to peak at 4.8% way outside of the policy target band of 0-3%.

The problem the bank has is that NZ's inflation is fueled by oil and commodity price inflation - as well as massive global producer price inflation - most of which the bank has no control over.

And so this is what happens when money bites. We wait (this winter in Wellington in front of the heater/fire) and read pamphlets about big screen TVs that the bank doesn't want us to start buying, just yet.


Click for big version

A group of Monetary Policy maestros from Scots College attended this morning's announcement

The bank's calculation is thus this:

- Downside risks of pushing the economy into an unnecessarily large recession are high.
- Downside risks of allowing inflation to get away are also very high.

Therefore the bank has decided for now to wait a bit longer before it actually relieves households from the economic choke hold they are currently in. Hopefully this will dampen our - fairly high - inflationary expectations. Perhaps more directly the shortage of consumer discretionary spending will encourage businesses to keep price rises to a bare minimum.

Interesting in all of this is the manner in which the NZ economy is seen by international markets. The Governor said the bank is not expecting any "stickyness" from banks in terms of lowering interest rates over coming months - mainly because there is a long way for them to fall before they come close to our trading partners.

And so NZ's interest rates are now expected to fall faster than all our major trading partners. According to forecasts around 2% over the coming 2 years (and downward projections tend to be conservative(.

This in turn is expected to create downward pressure on the NZ Dollar. After the announcement this morning the dollar declined 1 full cent to around 65.4 US Cents. As of 11.30am it has not however fallen out of bed and the Reserve Bank's desire for an orderly gradual depreciation in the dollar may still be on the cards.

Listen To The Governor's Press Conference
Press Play To Start Audio Playing….






DOWNLOAD MP3

NOTE: During the press conference (which you can listen to at the above link) somewhat leading questions from this writer concerning New Zealand possibly having a better economic outlook than some of our trading partners - and particularly the US - elicited a fairly skeptical response from the Governor.

ENDS

Anti©opyright C.D. Sludge 2008


© Scoop Media

 
 
 
 
 
Top Scoops Headlines

 

Scoop HiveMind Project: Universal Basic Income - Are We Up For It?

This is an opportunity for you as one of the 4 million potential funders and recipients of a Universal Basic Income to collectively consider the issue:
1. Is UBI is a desirable policy for New Zealand; and
2. How should a UBI system work in practice. More>>

ALSO:

Lyndon Hood: National Announces Plan To Hit Youth With Big Mallets

The National party has announced its youth justice policy, which includes a controversial plan for recidivist serious youth offenders to be hit over the head with a comically large rubber mallet. More>>

ALSO:

Lyndon Hood: This ->

It's been brought to my attention that Labour's new campaign slogan is "Let's do this". A collective call to action. A mission. I myself was halfway out of the couch before I realised I wasn't sure what it was I was supposed to do. More>>

ALSO:

Scoop Hivemind Report: What New Zealanders Think About Affordable Housing

Ordinary citizens have had very few venues where they can debate and discuss as to what they believe has led to the crisis in affordable housing and how we might begin to address this. The HiveMind on affordable housing was about redressing the balance. More>>

ALSO:

New Hivemind Exploration: Opening The Election - Freshwater Quality

This is an opportunity for you as one of the 4 million guardians of our common water resources to help us find mutually agreeable solutions to the critical task of collectively managing these resources for health and sustainability. More>>

ALSO: