Gordon Campbell | Parliament TV | Parliament Today | News Video | Crime | Employers | Housing | Immigration | Legal | Local Govt. | Maori | Welfare | Unions | Youth | Search

 


PREFU 2002 and Comments by Finance Minister Cullen

PREFU 2002 and Comments by Finance Minister Cullen

We have just published the following research.

Data Flash (New Zealand)

PREFU 2002 and Comments by Finance Minister Cullen on the RBNZ

As required by the Fiscal Responsibility Act, the Government today released its Pre-Election Economic and Fiscal Update (PREFU). Coming just 5 weeks after the Budget, little change in the Treasury's economic and fiscal projections was expected with the main development being the unexpected strengthening of the NZD. Therefore, not surprisingly, the Treasury now project marginally weaker growth, marginally lower inflation, and a more substantial deterioration in the current account deficit. As a result, the projected fiscal surpluses are marginally weaker. However, the Government anticipates no changes to the Bond programme at this stage, with the 2002/03 programme remaining $3.4bn.

Aside from releasing updated projections (set out in more detail in the table below), Finance Minister Cullen also took the opportunity to step up his criticism of the RBNZ. In part, we think this reflects genuine concerns that the Government has about the handling of monetary policy (in the recent context, the Bank's willingness to lead the world in the race to retighten policy settings). However, in our view, the timing of the comments also likely reflects the fact that the Government is now in `Election mode', and criticism of the RBNZ - especially with former RBNZ Governor Brash now a candidate for opposition National Party - is unlikely to be a vote loser. Indeed, the criticism is likely to be received well by many (the populist New Zealand First party is also on this bandwagon).

In terms of detail, Dr Cullen noted that the Bank's interpretation of the Policy Targets Agreement differs from that of the Government. In particular, the Government expects the Bank to use the full width of the 0-3% target band, rather than always aiming to move inflation back to the 1.5% midpoint. While Dr Cullen does not envisage widening the band, he did indicate that the Policy Targets Agreement may need some amendment when a new agreement is signed with the still-to-be-appointed replacement Governor. Should this occur, we think this may involve moving the RBNZ's target further in the direction of that pursued by the RBA - in particular, requiring the Bank to achieve 0-3% `over the economic cycle' rather than at all times, thus adding an additional degree of flexibility.

In our view, with the Labour Government enjoying a huge lead in the polls and virtually certain to be re-elected, markets should be pricing the probability that, post election, the Government will achieve one or both of (a) a more flexible Policy Targets Agreement (b) a more flexible Governor. This need not mean higher trend inflation over time (although at the margin, we suspect it probably does). However, it does mean that the Bank will tolerate greater variance of inflation with the 0-3% target range (indeed, the Bank has already moved in this direction over the past two years). In practice, this is likely to mean a more gradualist approach to setting interest rates.

It remains to be seen whether this criticism - which is perhaps the most explicit public criticism of the RBNZ that we have seen from a Finance Minister since the Reserve Bank Act was implemented - has an impact on the Bank's short-term policy making. The market is close to fully priced for a 25bp hike at next week's interim review and this is also the expectation of all analysts included in a recent Reuters poll, including ourselves. Given Dr Cullen's comments, a decision by the Bank not to tighten next week will no doubt be seen as the result of political interference, even if there are valid economic reasons why the Bank might have already decided to leave the OCR unchanged. Indeed, even before today we felt that there was a 25% chance that the Bank would skip next week's meeting, mainly due to the unexpected tightening of conditions that had occurred as a result of the appreciating NZD, together with increasing uncertainty about the pace of the US recovery and its implications for Asia. On balance, we think that the prospects for next week are largely unaltered, but today's comments reinforce our view that the market is currently too pessimistic about the amount of tightening that will take place over the coming year. We look for the OCR to peak at 6.25% by year-end.

Darren Gibbs, Senior Economist,

***The attached research constitutes Deutsche Bank's proprietary information*** This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

Please do not respond to this mailbox. If you would like to stop receiving this email or request additional research, you can use our online subscription management tool at http://research.gm.db.com/MySubs. Please note that a login to our web site is required for this. Alternatively, please contact your Deutsche Bank Sales Contact.

© Scoop Media

 
 
 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

 

Also, Loan Interest: Productivity Commission On Tertiary Education

Key recommendations include better quality control; making it easier for students to transfer between courses; abolishing University Entrance; enabling tertiary institutions to own and control their assets; making it easier for new providers to enter the system; and facilitating more and faster innovation by tertiary education providers... More>>

ALSO:

Higher Payments: Wellington Regional Council Becomes A Living Wage Employer

Councillor Sue Kedgley said she was delighted that the Wellington Regional Council unanimously adopted her motion to become a Living Wage employer, making it the first regional council in New Zealand to do so. More>>

ALSO:

Scoop Images:
Dame Patsy Reddy Sworn In As Governor-General

This morning Dame Patsy Reddy was sworn in as the New Zealand Realm’s 21st Governor-General. The ceremony began with a pōwhiri to welcome Dame Patsy and her husband Sir David Gascoigne to Parliament. More>>

ALSO:

Ruataniwha: DOC, Hawke's Bay Council Developer Take Supreme Court Appeal

The Department of Conservation and Hawke's Bay Regional Investment Company (HBRIC) are appealing to the Supreme Court over a conservation land swap which the Court of Appeal halted. More>>

ALSO:

With NZ's Marama Davidson: Women’s Flotilla Leaves Sicily – Heading For Gaza

Women representing 13 countries spanning five continents began their journey yesterday on Zaytouna-Oliva to the shores of Gaza, which has been under blockade since 2007. On board are a Nobel Peace Laureate, three parliamentarians, a decorated US diplomat, journalists, an Olympic athlete, and a physician. A list of the women with their background can be found here. More>>

Gordon Campbell: On The Key Style Of Crisis Management

At Monday’s post Cabinet press conference Key was in his finest wide- eyed “Problem? What problem?” mode. No, there wasn’t really a problem that top MPI officials had been at odds with each other over the meaning of the fisheries policy and how that policy should be pursued... More>>

ALSO:

Mt Roskill: Greens Will Not Stand In Likely Post-Goff By-Election

“The Green Party’s priority is changing the Government in 2017, and as part of that we’ve decided that we won’t stand a candidate in the probable Mt Roskill by-election... This decision shows the Memorandum of Understanding between Labour and the Green Party is working." More>>

ALSO:

Get More From Scoop

 

LATEST HEADLINES

 
 
 
 
 
 
 
 
 
Politics
Search Scoop  
 
 
Powered by Vodafone
NZ independent news