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It’s Easier To Be More Right If You Say Less

Dr Don Brash, New Zealand Reserve Bank Governor, took the prudent course this morning and for the second time since May called the present inflation outlook too close to call.

The bank’s decision not to raise interest rates will be welcomed both politically and in business circles. It was expected, almost unanimously, by the market and the announcement is not expected to have any great impact either on the dollar or interest rates today.

That said, the outside chance that the bank would raise interest rates anyway (Dr Brash is not known for his reticence about these things) still had market watchers a little nervous this morning.

In his statement Dr Brash is forecasting a spike in headline (CPI) inflation to over 4% in the December and March 2001 quarters followed by a steep decline in inflation starting mid 2001.

This on its face is fairly bad, but once one-off contributors to this inflation spike are taken out, including oil prices and cigarettes, the underlying inflation rate is expected to remain “well” within the 0-3% target range the bank is required to work towards.

With cigarette and petrol excluded from the inflation measure the bank’s figures for inflation in the June 00 and September 00 quarters are a healthy 0.9% and 1.3% respectively.

Interestingly, for the first time in several years - and in a departure from the forecasts of most trading banks - the central bank is no longer forecasting a fast appreciating currency on a trade weighted basis with the TWI forecast to rise just 1% a each year through the next three years.

This compares to some bank forecasters who have forecast a 25% rise in the USD cross rate over the next 18 months. It compares to August MPS Reserve Bank projections showing the TWI rising at roughly 6% per annum for the next three years.

Some market watchers will no doubt find it rather ironic that the RBNZ’s change in approach to dealing with the currency has been accompanied by the first signs in nearly two years that the NZ Dollar is finally about to turn around and start rising.

Another change evident in this latest Monetary Policy Statement has been new guidelines to the presentation of information. No projections are given in today’s document to any greater accuracy than the closest half a per cent (with the exception of inflation). And in the case of GDP projections quarterly predictions have been discarded altogether.

Last time round the hill in August, the bank forecast a 0.2% contraction in the June quarter only to have Statistics NZ unveil a 0.7% contraction weeks later.

This time the bank seems to have adopted a “what you don’t say you can’t get wrong” approach to medium term GDP projections, arguably the key component to any economic forecast.

In today’s MPS the bank does not directly address the question of whether we have experienced growth in the September quarter at all saying just, “our judgment…is that the economy has started growing again…. Over the second half of this year, we expect that the economy will have expanded by around 1.5%.”

The bank goes on to explain in part why it is so reticent to pin a tail on this particular donkey. “Picking the near term direction of the economy with any degree of precision is made difficult by noisy and inconsistent indicators,” the bank says.

As to why the bank is forecasting growth in September and October in the face of such noisy indicators the general reasoning, like that of National Finance spokesman Bill English in is recently famous memo, is that the farmers are doing so well that the economy must be growing.

If the RBNZ is correct about the second half of calendar 2000 then the NZ economy will have grown 1.6% over the year, a figure that compares rather unfavourably with the 4.2% annual growth experienced to March 2000.

Ultimately the proof either way will not be seen till September GDP numbers come out on December 21st.

And in the meantime the health or otherwise of the NZ economy, notwithstanding National Party economist Bevan Graham’s “rampant export growth”, will remain relatively opaque.

ENDS

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