Reserve Bank lowers cash rate

July 24th, 2008 at 11:54 am by David Farrar

Before I get onto the main topic, I noted on the website there has been a new appointment to the Board of the Reserve Bank. Dr . Dr Eichbaum recently published a fascinating paper on the role of Ministerial Advisors.

I have absolutely no view on the suitability of Dr Eichbaum’s appointment. I do note however that the Minister forgot to mention that Dr Eichbaum worked in the Ministerial offices of Steve Maharey, Mike Moore and Geoffrey Palmer. That would have been useful to disclose.

The Government has been busy with over a hundred appointments in recent times – they also just appointed four Labour/left people to the new Land Transport Board.

Anyway back to the official announcement:

“Recent oil and food price increases mean that annual CPI should peak around 5 percent in the September quarter of this year. However, we expect that will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.

So the cash rate dropped 25 basis points to 8.00%. I would like to know exactly when the Reserve Bank thinks inflation will drop back to under 3%? 2009? 2010? 2011?

TVHE comments:

Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).

I predict inflation will remain outside the target band for some years.

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18 Responses to “Reserve Bank lowers cash rate”

  1. labrator (1,850 comments) says:

    I wonder if this will trigger a currency collapse from the Japanese bonds being sold. If so, not only will inflation sky rocket but so will mortgage rates as the borrowed money from overseas just got a whole lot more expensive to repay.

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  2. georgedarroch (317 comments) says:

    Dr Eichbaum was a great lecturer at the VUW public policy school, and I wouldn’t consider his appointment a partisan one – he was liked and respected across the political spectrum, among the people I knew anyway.

    [DPF: And I have been careful not to criticise the appointment per se. Just the lack of disclosure he is a former Labour staffer (and Unionist).]

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  3. PhilBest (5,125 comments) says:

    Yep. Tragic just who is in power in NZ when there has been years of good times and responsible economic management preceding them, and who only gets to get into power just as things are turning to custard both internationally and as a result of domestic economic leftist profligacy.

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  4. Zippy Gonzales (485 comments) says:

    I think you’ll find that the 1-3 percent inflation band is an aspirational guideline only, a bit like the Cabinet Manual.

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  5. kisekiman (219 comments) says:

    Bollard having rejected conventional wisdom that interest rates are the primary tool to fight inflation will now with the assistance of the esteemed Dr Cullen attempt to “talk” inflation down and perhaps use some of those foreign currency reserves to prop up the NZD for all of about five minutes before they run out.

    Great news for exporters though.

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  6. Gooner (995 comments) says:

    The best thing Bollard could have done was to drop the OCR by at least 75 basis points, leading to an export recovery (of sorts) and putting the imported products out of reach of most people by becoming too expensive. This would have also had the effect of raising interest rates (the offshore cost of money is unaffected by the OCR) BUT, the net effect would have been Kiwibank would have benefited enormously as it doesn’t raise its money offshore and therefore could have started a mortgage ‘war’ or could have led the way with a .5% (or so) cut to floating rates. Then Helen (and Jim) could have really extolled its virtues!!

    He’s actually gutless with all these .25 movements.

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  7. getstaffed (9,186 comments) says:

    The Government has been busy with over a hundred appointments in recent times – they also just appointed four Labour/left people to the new Land Transport Board.

    100+ socialist sleepers with plausible role-suitability today, and party/ideology suitability for tomorrow.

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  8. freethinker (691 comments) says:

    Me thinks John Key should be drafting the “Retrospective public appointments revocation and contract nullity Bill”

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  9. unaha-closp (1,165 comments) says:

    So the cash rate dropped 25 basis points to 8.00%. I would like to know exactly when the Reserve Bank thinks inflation will drop back to under 3%?

    Could be that the recent crude oil price drop has played a part in reducing inflation expectations.

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  10. Portia (175 comments) says:

    Did anyone read Bernard Hickey’s blog this week on the state of the real estate industry?

    http://stuff.co.nz//blogs/showmethemoney/2008/07/22/were-in-stage-1-of-the-5-stages-of-real-estate-grief/

    He says:

    “In decades to come, 2008 will be seen as the ground zero of a market collapse in the same way that 1987 is seen as the year New Zealanders fell out of love with the stock market permanently.”

    BH was also talking to Kathryn Ryan this morning. He predicts that the Reserve Bank’s lowering of the cash rate will not be followed by a drop in interest rates. Apparently the trading banks were all poised to raise rates still further, to cover their own rising credit costs. So, the lower cash rate may prevent mortgage payments from continuing to increase, at least in the short term,

    He also pointed out this morning that there are about 40,000 home owners due to come off fixed interest rates this year. These people are likely to have been paying less than 8%; in other words, a significant number of people have not yet realised the full impact of higher mortgage payments.

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  11. Crampton (215 comments) says:

    I would love for RBNZ or Parliament to define outcomes that they would deem inconsistent with the PTA. Because it seems currently that any outcomes whatsoever can be rationalized as consistent with a very hazy PTA. If we take RBNZ forecast inflation as accurate and assume constant 2.6% inflation after the end of the forecast window, we have to average over 35 quarters centred around the current quarter if we want average inflation to be below 3%. That is not consistent with any sensible reading of the medium term. And, combined with an interest rate cut, it’s certainly not consistent with a RBNZ that cares overmuch about inflation outcomes.

    Inflation targeting has failed under Alan Bollard. Inflation outcomes happened to fall below the threshold for many quarters only because tradable inflation was low or negative. It will be interesting to see how and whether some future Governor might seek to re-establish credibility.

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  12. Matt Nolan (73 comments) says:

    “Could be that the recent crude oil price drop has played a part in reducing inflation expectations.”

    I don’t think the recent fall in crude oil prices (which is still small compared to recent increases) would have had a substantial impact on inflation expectations. Even if it did, the Bank didn’t mention inflation expectations in their statement – but they did say that high oil prices will reduce domestic demand, and thereby reduce inflationary pressures.

    If that is the point of view they are taking, recent falls in the petrol price will increase domestic demand, and thereby increase inflationary pressures – so if crude oil fell to $80 a barrel they would be looking at hiking rates again instead of cutting. This is because they are targeting medium term price increases (or true inflation) rather than targeting annual growth in the CPI.

    “I would love for RBNZ or Parliament to define outcomes that they would deem inconsistent with the PTA. Because it seems currently that any outcomes whatsoever can be rationalized as consistent with a very hazy PTA.”

    Completely agreed – spot on once again!

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  13. Owen McShane (1,226 comments) says:

    What the Reserve Bank does will have little effect on the recession.
    The only institutions which can make a difference are the Regional and Local Councils – they need a total change of attitude. As long as they regard growth as a problem (even when the economy is in decline) we can never build our way out of this recession.

    Would you believe that, at this time, the Queenstown Lakes District Council has a proposed plan change which will
    introduce Linkage Zoning – another Smart Growth Idea which has proved a disaster in the US?

    This linkage zoning imposes a significant levy on new commercial buildings, such as hotels, because of the theory that
    they generate a demand for employment which must be housed and hence they have to contribute to a fund to provide
    affordable housing in special zones. In other words employment is a bad thing which must be taxed like cigarettes.
    For a regular motel this can be 150,000 to 200,000.
    When we need development, to build our way out of recession, these clowns decide to tax it.

    And remember where the whole problem all started.

    The Antiplanner is my friend and colleague Randal O’Toole.

    “Planning-induced housing bubbles not only threaten individual families and local economies,” the Antiplanner wrote in Best-Laid Plans, “they threaten the world economy.” Those threats are being realized today.

    While all kinds of reasons have been offered to explain the housing bubble, I still insist that growth-management planning was the initial cause. My evidence is the dog that didn’t bark.
    To look at the graphic illustrations go to: http://ti.org/antiplanner/?p=468#
    The comments demonstrate how some people can talk their way out of anything – especially when they are the ones at fault.

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  14. gd (2,286 comments) says:

    Owen the bozos who support the current situation just cant get it thru their heads that when you have a situation where the cost of the land is a multiple of the cost of building the house that occupies then there is a problem of demand over supply.

    Now thats great for some but not so good for others as we all know.

    What is their motivation and is it benign because they are too thick and dumb to realise the problem or is it more sinister in that they seek to profit either dreictly or indirectly.

    Would appreciate your comments

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  15. side show bob (3,660 comments) says:

    “The only institutions which can make a difference are reigional and local councils” and where did these parasities get their powers to have their evil ways Owen. No the blame can be layed at the feet of the socialists as they have failed to protect the people from these predators and in fact in many instances they have encouraged it.

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  16. OECD rank 22 kiwi (2,752 comments) says:

    My inflationary expectations in New Zealand just went way up.

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  17. OECD rank 22 kiwi (2,752 comments) says:

    Bollard should have hanged tough. I wonder how National is going to view his reappointment to the Reserve Bank once they are in power later this year. Bollard might become a convenient scapegoat closer to the next election in 2011 if inflation still isn’t under control by then. I’m sure this rate drop will have no meaningful effect on mortgage rates. The good news is we can now watch the New Zealand currency collapse. Just the kind of kick in guts New Zealand needs to make a bad recession worse. It will increase the pain for people on struggle street while simultaneously giving more money to New Zealand’s only productive sector, the farmers (Dairy farmer in particular). All good news for National and disastrous news for Labour.

    Goodbye Hels, don’t let the door hit your ass on the way out.

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  18. Owen McShane (1,226 comments) says:

    gd and side show bob,
    Your questions are valid but would require a major treatise to answer and I am sure people are working on the books right now.
    I first became aware of the “meme” of Smart Growth when I wrote a report for Don Brash as governor of the Reserve Bank back in 1996.
    My report was pilloried in the local press and the ARC actually commissioned a report which declared that the bried was “to refute it”.
    However, I linked in to a group around the world who were raising all the warning signs and predicting everything which has come to pass. But Smart Growth had already established itself as a “religion” or “Mass movement” which proved virtually unstoppable except in those American States where independence and fear of government was well entrenched.
    The Herald etc refused to publish any essays I wrote pointing out what was going on and the excellent work by our Motu research team (Headed by Dr Grimes – current chairman of the Board of the Reserve Bank) went unreported. When I phoned Fallow of the Herald to draw his attention to the Motu work on Nelson Tasman be hung up on me.
    By this tim (a year or so ago) virtually everyone has a financial stake in keeping the bubble inflated. Helen Clark owns five houses so I suppose we should not be surprised that she officially opened the Smart Growth programme in Tauranga Western Bays. Smart Growth fans were appointed to important boards. Mike Williams for example. We paid American Smart Growth fans to come out to work in the MfE and spread the word. Demographia came to the rescue by publishing their rankings of housing markets using the affordability index which made such comparisons easy.
    I see a great similarity between Smart Growth and Global Warming if only because the same people tend to believe in both. Al Gore made the fight against Urban Sprawl a key platform in his presidential campaign – and Smart Growth was the answer.
    I do wonder if anyone will be prepared to admit error.

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