PM on OCR

December 2nd, 2008 at 8:47 am by David Farrar

The Herald quotes John Key:

“We’ll be looking, like others, to see what the governor does on Thursday but we would be anticipating significant rate cuts,” he said.

I’ve noticed that as Opposition Leader, John would often predict or even suggest what the Reserve Bank will do with the official cash rate. It was an annoying habit in Opposition, but a bad habit to keep going in Government.

In some ways the PM is just stating the obvious. Even the stupidest first year economics student knows that the Reserve Bank will cut the cash rate on Thursday. The only debate is by how much.

So, to be fair, when the PM says he is anticipating significant rate cuts – he is speaking literally – he is anticipating cuts, like everyone else.

But he is not like everyone else. He is the Prime Minister. And it is unwise to carry on a commentary on what you think the Reserve Bank Governor will do, when you hold that job. Because sooner or later it will be interpreted as pressure. It will be seen as trying to indirectly instruct the Reserve Bank – even if that is not the intention. It will one day generate negative headlines when the PM predicts one thing, and the Reserve Bank goes the other way.

Here’s my preferred responses for a PM on what the Reserve Bank will do:

Well the Reserve Bank makes it own decisions on the cash rate, and I don’t think it is helpful for me to speculate – I’ll leave that to the bank economists.

As I said above, it isn’t a big issue this time, because it clearly wasn’t a comment to pressure the Reserve Bank – it was stating the obvious. But in future the circumstances may be different, and best to bury a bad habit early – in my opinion.

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29 Responses to “PM on OCR”

  1. first time caller (384 comments) says:

    Pressure away John, I need to fix my mortgage again shortly…

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  2. jacob van hartog (309 comments) says:

    Funny that Key hasnt got the difference between being PM and a nobody

    and FTC dont fix your rate yet , let it float for another 9 months,

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  3. expat (4,048 comments) says:

    Yeah, I agree to a point. But wouldnt it be refreshing if the PM said what he meant and meant what he said.

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  4. Adolf Fiinkensein (2,834 comments) says:

    Good God! You mean journalists aren’t required to decide what the PM said or didn’t say, meant or didn’t mean? You mean they aren’t IMPORTANT anymore?

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  5. Ben Wilson (523 comments) says:

    It might even be a good idea if the PM actually knew what the moves would be. The Reserve Bank being independent doesn’t mean that the other person with the greatest level of control over the economy should be kept in the dark like everyone else.

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  6. jacob van hartog (309 comments) says:

    ..but WE would be anticipating …

    is that the royal “we” I read here.

    Did the conversation with the Queen start out

    JK … we are pleased to meet you..

    Q.. we also..

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  7. Murray (8,842 comments) says:

    You want to see a nobody van hartog then get a picture of Helen Clark. Airbrushed or otherwise.

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  8. grumpyoldhori (2,416 comments) says:

    Health savings accounts, the model that dubya is so keen on.
    Interesting model, if one is born with heart problems one is totally fucked.
    But, it will help to drop tax levels and that is the most important thing.

    http://thinkprogress.org/2006/01/30/the-truth-about-health-savings-accounts/

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  9. kiwipolemicist (393 comments) says:

    Here’s something that they probably don’t teach in first year economics: reducing the OCR steals money from everyone.

    When the OCR is reduced money is cheaper so people want to borrow more. The government prints more money to meet demand, devaluing each existing dollar (this is visible as inflation) and thus stealing wealth from everyone. The present crisis is due to the USA printing piles of money in recent years and the response is …. printing more piles of money. Stop digging John.

    Welcome to socialist Keynsian economics from Key.

    http://www.kiwipolemicist.wordpress.com

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  10. Redbaiter (13,197 comments) says:

    Best just to wind up the reserve bank.

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  11. anonymouse (708 comments) says:

    David, While I would agree with you that having the PM commenting on what he is anticipating the RB governor will do in terms of interest rate changes is not the best look, there are a couple of reasons why in the short term at least it is not a problem.

    1) given the current global funk, the perceived walls around independent monetary policy around the world are increasingly becoming a bit more porous, with coordinated efforts involving both monetary and fiscal policy ( along with the kitchen sink) being thrown at the problem. – Markets are no longer as jittery about politicians getting close to the monetary levers, as the markets currently need the politicians to save their bacon.

    2) Key is best when he is direct in answering questions, his ability to fudge, weave and dive is no where as well honed as Clark had become after a lifetime in Parliament- and he can get himself tied up if he ends up backtracking in a single sound bite ( ala the TVNZ ambush over the Tranzrail issue.

    [DPF: Fair points]

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  12. goodgod (1,363 comments) says:

    Regardless of who says it and why, it’s a matter of political discipline that only John Key can change, if he wants to. Some of his MP’s are more professional than he is. From a spectators point of view it is bad form and probably a symptom of the whole “John Key the bloke” approach to politics in NZ at this time. 40 years ago the PM did not try to be your best mate, he was a respected and distant public figure. That respect tempered the responses of both PM and public. Mind you, what is respected these days?

    Helen made a habit of commenting on everything, even BSA rulings, as if the whole country was her personal blogspace.

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  13. Lee C (4,516 comments) says:

    Et Tu, David?
    Ah yes, the perception that refuses to wane. The perception so ably promoted by Helen Clark, that Key is a ‘lightweight’. So willingly endorsed by the likes of John Armstrong this very morning, and now apparently unconsciously adopted by even the righties.
    The fact is, John Key is now the elected PM, not a ‘nobody’ and certainly not in opposition. It is his job to stamp his own credentials and style onto the role, he’s proven that he has the minerals to put his own reputation on the line, so for how long are we going to wallow in the rather vaccuous fiction first mooted by the ex PM and so willingly parroted by the likes of the VDS?

    One of the rationales for electing Key and his team was that he would be better and safer in charge of our economy in these unsure times. The cosy little past is over, and regardless of what Key does, he will attract more critical pressure than Clark ever experienced. Hence his approach will not echo hers. Get used to it.

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  14. Turpin (342 comments) says:

    Independant!
    Little old NZ at the arse end of the world, Yeah right.
    Australia coughs and we duck, Asia coughs and we look for something to hold onto.

    JK is our only hope right now for the next 3 yrs, that’s why we voted for them.
    Compared to Cullen he’s not lightweight, probably better.
    I’d rather he spoke straight and not duck and dive, we need a PM we can trust again.

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  15. Dyannt (28 comments) says:

    If the Reserve Bank governor is so easily influenced by a public comment then he is not the right man for the job.

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  16. berend (1,676 comments) says:

    DPF: Even the stupidest first year economics student knows that the Reserve Bank will cut the cash rate on Thursday.

    Yeah. We all know that the Reserve Bank is stupid, and will be, and will plunge us into even more cash. Watch the NZ dollar dive. If the Reserve Bank had any guts, they would do nothing. And on those students of economics: how about studying some real economics, instead of the theories of economists that were swimming naked?

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  17. Graeme Edgeler (3,277 comments) says:

    An odd move by Key – particularly in light of his first great parliamentary gotcha – Michael Cullen accidentally announced an interest rate rise a day early – you don’t quite pick up Cullen’s sheepishness from the transcript, but it was a great catch by Key, so one would assume he’d know the game here:

    1. CLAYTON COSGROVE (Labour—Waimakariri) to the Minister of Finance: Has he received any recent reports on the New Zealand economy?

    Hon Dr MICHAEL CULLEN (Minister of Finance): With some trepidation, I answer. I have received a number of reports highlighting the strength of the New Zealand economy. Rating agency Standard and Poor’s has today reconfirmed our double AA credit rating, which it states is based on this Government’s sturdy financial management. The National Bank’s National Business Outlook observes: “Good news about our economy seems to be everywhere.” Although the Reserve Bank raised interest rates today, it did so because growth is so strong. [Interruption]

    Mr SPEAKER: That is the one warning today.

    Clayton Cosgrove: What other reports and analyses has he received in respect of the economy?

    Hon Dr MICHAEL CULLEN: I received a report that New Zealand’s legal system, education system, and political environment are so strong that they would support the creation of an offshore banking centre in New Zealand. That came from the Opposition spokesperson on finance. As I am sure he is aware, there are also considerable reputational risks with regard to offshore banking centres.

    John Key: Can the Minister confirm for the House that he has just announced, in his answer to the question, the interest rate rise that we assumed the Governor of the Reserve Bank would be announcing tomorrow?

    Hon Dr MICHAEL CULLEN: I am following upon all the background from economists, who are all projecting that interest rate tomorrow—[Interruption] All I can say is that if there is not one, I will be very surprised indeed this time.

    (http://www.parliament.nz/en-NZ/PB/Debates/Debates/1/c/a/47HansD_20040908_00000114-Questions-for-Oral-Answer-Questions-to-Ministers.htm)

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  18. jacob van hartog (309 comments) says:

    I think Key will be ‘anticipating’ interest rate CUTS, so he gets his name in voters minds, for a while yet.

    When they do rise, I think Key will go back to being the Minister of Tourism

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  19. Ruth (178 comments) says:

    I wish people like ‘Kiwi Polemicist’ and others with fringe economic views would shut up about ‘printing presses’ and the govt ‘printing money’ and so on.

    It’s condescending. People aren’t stupid.

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  20. berend (1,676 comments) says:

    Yes Ruth, the fringe economists who saw this coming you mean? They should shut up? Why not shoot them?

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  21. Tauhei Notts (1,651 comments) says:

    How about John Key kick some butt and get the prescribed rate for low interest loans under the Fringe Benefit Tax legislation lowered from 10.57%.
    Sure, if I had an employee like Michael Cullen I would charge him no less than 10.56%, but, seriously, this rate has got way out of line.
    What it means is that if, as an employer I lend money to an employee and, like the Venetian merchant class demand 9.57%, I would be liable for Fringe Benefit Tax on the “LOW’ interest rate I had charged. This is palpably absurd. But the PM’s mum may not like my oblique reference to Shylock.

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  22. kiwipolemicist (393 comments) says:

    Ruth: being on the fringe doesn’t necessarily mean being wrong. William Wilberforce was on the fringe when he was trying to outlaw slavery.

    You also accuse me of condescension. Is it condescenion if you’re crossing the road and I warn you that you’re about to be hit by a truck?

    http://www.kiwipolemicist.wordpress.com

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  23. adamsmith1922 (890 comments) says:

    David

    I disagree

    Key is perfectly entitled to ‘jawbone’

    US Presidents have done so for decades

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  24. Ruth (178 comments) says:

    I didn’t say you were wrong. I said you were condescending. Which you are.

    It is an urban legend that the RBNZ actually ‘prints money’ with OCR drops. We are on the board of the Banker’s Assoc. and advise the RBNZ and comments such as yours are unhelpful.

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  25. PhilBest (5,120 comments) says:

    Understand your irritability, Ruth, but isn’t it looking like time to give the Ludwig Von Mises society/”Austrian School” people a fair go? The Reserve Banks and political advisory boards of the world are dominated by Keynesians and Monetarists who didn’t see the latest crisis coming, and not only haven’t lost their influence as a result, but have increased it, if anything. Look at all the Obama team appointments. Meanwhile, the Von Mises people like Peter Schiff are saying that this is HUGE, and it isn’t going to go away with government “input”, whether tax and spend, borrow and spend, or “printing money” (and you KNOW what is meant by that broad term). What if they’re right? On past performance, who should we be believing now?

    Maybe the word will spread via people watching Peter Schiff on Youtube, and someone like Ron Paul will win the Presidency one day on the strength of the Ludwig Von Mises School of economics followers being proved right over and over and over again – if things don’t go so far that it becomes just too plain late for civilisation.

    You tell me in a nutshell why these people are wrong. Or do all you mainstream office holders just ignore what they say?

    http://mises.org/

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

    Ruth if the RBNZ is going to print some new dosh do you think they could send out some free samples?

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  27. kiwipolemicist (393 comments) says:

    PhilBest: thank you, you’re right on the money (bad pun I know).

    http://www.kiwipolemicist.wordpress.com

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  28. Kiwi Trader (18 comments) says:

    Money supply is being expanded by central banks and treasuries around the world, not just in New Zealand. That is a fact acknowledged by most and needed in these turbulent times. But it is not an issue yet, as inflation is collapsing because lack of demand is dropping commodity prices. But this won’t last forever. If central banks do not, in due course, pull back all the “printed” money being released, then we will have an even greater inflationary problem in 12 months or so. But that’s next years problem. Right know we are still trying to fix the credit crisis. The race to zero interest rates continues.

    And I agree with DPF, John will have to be more circumspect going forward….right now he is just stating the obvious.

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  29. Seán (397 comments) says:

    Well all sensible logic DPF, but what a typical Helen-esque quote you pulled out as your preferred response! Is this the start of an “Animal Farm” scenario where the new regime becomes the same, and then worse than the old regime…???

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