Kiwiblog

I remember the days when a 50 basis point drop was a big thing. Now we have 150 point drops that are in line with expectations.

This should start to push mortgages back into the affordable category for more people.  Of course depends where retail rates go.

Don Brash writes an op-ed in response to Finlay MacDonald’s call for politicians, not the Reserve Bank, to be in charge of determining interest rates. Brash responds:

He then goes on to argue that “plenty of people” see this act “as a relic of failed economic dogma, well past its due date for reform”, although he mentions only two people by name – Jim Anderton and that well-known economist Winston Peters.

Need more be said.

He links the Reserve Bank Act and similar legislation elsewhere to the current financial crisis.

Whatever the cause of the current crisis, nobody that I know of seriously suggests it was caused by our Reserve Bank, or other central banks, focusing monetary policy on keeping inflation under control by keeping interest rates too high. Indeed, there are many observers who believe that the trigger for the current crisis was interest rates in the US being kept too low for too long, with the result that banks were encouraged to lend to a large number of borrowers of very marginal creditworthiness.

Excellent point.

First, the central banks of virtually all developed countries – certainly the United States, the United Kingdom, Canada, Australia, and the countries of the European Monetary Union – have removed monetary policy from the day-to-day influence of politicians. Why? Because experience over decades has shown that politicians have a tendency to manipulate monetary policy for their own political advantage, to the economic cost of their countries.

I can’t comprehend why anyone would want Rob Muldoon setting interest rates again.

Fourth, nothing about New Zealand’s experience since we reached price stability in 1991 suggests that focusing monetary policy on keeping average prices stable damages growth or employment. We’ve had some of the best growth in our history over the past 16 years, and, until recently, we had the lowest level of unemployment in the developed world.

Exactly. Emperical evidence is overwhelming that you can have low unemployment with monetarist policies. Likewise overwhelming evidence that you can eliminate protectionist trade barriers and have low unemployment.

Fifth, while dropping interest rates can stimulate economic activity in the short-term, all countries have learnt from bitter experience that, in the longer-term, using interest rates to try to get faster economic growth results only in damage to economic growth, as inflation makes it harder to interpret the price signals coming from the market. Sustainable economic growth ultimately depends on increasing output per person employed in other words, on productivity and tolerating higher inflation does nothing to achieve that goal. If it did, Zimbabwe (with high inflation) would be enjoying fantastic economic growth and high living standards, and the United States (with low inflation) would have poor growth and low living standards.

Whatever the problem is, high inflation is never the answer.

Look at that baby drop. The Governor is not giving much away about further drops, but I think we can expect at least 50 more basis points next year.

The Herald quotes John Key:

“We’ll be looking, like others, to see what the Reserve Bank 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.

The Reserve Bank has dropped the Official Cash Rate by 100 basis points, as many had predicted.

This is the biggest ever single movement – previous moves had been as high as 50 basis points but never a 75 or a 100 before.

The Governor says:

“With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

The domestic inflation is what causes the risk of stagflation.

“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”

I can think of some domestic costs that could be reduced!

News that the Reserve Bank of Australia has dropped their official cash rate by a huge 100 basis points gives some inidcation of how weak various economies are.

NZIER released their quarterly survey of business confidence yesterday. On the basis of it they predict the recession will last for at least another two quarters. A net 32% of firms have reported a decline in trading activity and a net 13% expect trading activity to fall further in the next three months.

It is in that context, and the decade of deficits announced by Michael Cullen on Monday, that National have modified their tax package which will be announced later today. This is both necessary and responsible. The public want a tax package that takes account of the last few weeks, let alone the last few months.

The scary thing with the PREFU numbers is they were finalised five weeks or so ago, so do not include the latest shocks from the US. As the Herald says:

Party leader John Key yesterday admitted that the pre-election opening of the books by the Treasury showed a picture that was much worse than he had expected.

“We’d always expected a slowdown, but I don’t think anyone saw deficits for 10 years and such a deterioration in the accounts.”

The economic and fiscal update showed cash deficits forecast to reach $7 billion and budget deficits for the next 10 years. …

No-one at all was expecting it to be that bad.

Also behind the decision is the fact that the forecasts revealed by the Treasury this week do not take into account the tumultuous events of the past month, in which banks have collapsed, the US Government has approved an enormous bail-out deal for Wall Street, and the flow of credit internationally has virtually seized up.

Who knows where it will end. Now this is no reason not to have tax cuts at all – they are important as one factor in lifting economic growth. But some caution around size and timing is essential.

Prime Minister Helen Clark yesterday cast doubts on National’s statement that it had scaled down its tax cut plan.

“I believe they over-promised on their tax package and they are now using the excuse of the books to try and talk down expectations,” she said.

I am tempted to call the PM a moron for that comment, but I know she is not a moron so all I’ll say is she is playing dumb. If she really thinks a decade of deficits is simply an “excuse” then she is in la la land.

But here is what is really interesting. We have seen National says “Yes we will modify our plans in wake of the financial crisis” while Labour says it is not going to change anything. Dr Cullen ruled out any change to tax or spending in the PREFU lockup. At most they might delay some of WInston’s new bureaucrats. Labour are happy to have ten years of deficits and debt rising from under 20% to 30% of GDP.

Labour have had it easy for the last nine years. They have never had to make tough decisions, and now the economy is in reecession they have no idea and no plan as to what to do to prevent a decade of deficits. Their biggest problem for the last decade has been what new schemes to dream up to spend our money on – hey lets put a billion more into Working for Families, no no lets buy some trains for a billion, no no let’s give pensioners free bus trips, no no let’s give public servants a pay rise but only if they join the PSA etc etc.

Because the economy, helped by strong commodity prices, has been so strong they have been able to say no to measures that would boost labour productivity and economic growth. Many of these measures (such as RMA reform) will be unpopular with some lobby groups, so why bother to take the heat, when hey we have enough money without such reforms.

But now Labour has run out of money. They are content to run ten years of deficits. They are not willing to take any hard decisions about lifting our economic growth, let alone paring back any of their spending schemes.

We’ll hear later today what National’s plan is. I think it will be measured, significant and popular. It will of course be attacked by Labour and the unions. National could announce the second coming, and Labour and the unions will attack it. Hopefully at some stage, somone may ask Labour what their plan is? Their plan is to not change tax rates and not change spending significantly. Their plan is a decade of deficits.

The Reserve Bank has dropped the cash rate a full 50 basis points from 8.00% to 7.50%.

Reserve Bank Governor Alan Bollard said: “The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.

I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.

I also remain concerned that inflation will remain too high for years to come.

I mentioned yesterday how the Government’s appointment of Chris Eichbaum to the Board of the Reserve Bank forgot to mention his role in at least three Labour ministerial offices.

Now I have no position on the merits of Dr Ecihbaum’s appointment as I simply have not read enough of his background and CV to judge the contribution he can make to monetary policy.

But a reader has sent me this extract from NBR in 2002:

In a letter published last week in response to the previous week’s NBR editorial, “Chris Eichbaum of Wellington” accused the National Party of hiding the identities of funding donors through trusts. Mr Eichbaum claimed this did not allow citizens to judge the extent to which particular interests, whether domestic or foreign, were influencing policy formulation. Several people have asked if this is the same Chris Eichbaum who is a senior lecturer in public policy at Victoria University’s school of government? Yes And if he is the same Chris Eichbaum who disqualified himself recently as chairman of a debate between Social Development minister Steve Maharey and National’s welfare spokeswoman Judith Collins because he was seen as too close to Mr Maharey to be neutral? Yes And if he is the same Chris Eichbaum who once worked in Helen Clark’s office? Yes As he is the same man, ought not he have disclosed his background before calling on all donors to the National Party to do likewise? No, he says.

Of course it is now members of Helen Clark’s Government who are facing questions over secret trusts and her Government which was so remiss in mentioning Dr Eichbaum’s background with this appointment.

NBR also reported he has been a member of the Labour Party for more than 20 years.

Before I get onto the main topic, I noted on the Reserve Bank website there has been a new appointment to the Board of the Reserve Bank. Dr Chris Eichbaum. 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 inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation 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.

One of the signs of third termitis is the automatic defence of the status quo. The Government and associated left blogs have rushed to defend SPARC, and claim thereis no need to change anything.

I was intrigued by National’s sports policy as it appeared to be meticiously well researched and referenced. What that suggests to me is that sporting insiders have been helping write the policy because of the level of knowledge.

Since the policy was released, I’ve chatted to a few people in the sports administration arena, and to a person they are critical of SPARC and its growing bureaucracy. Now a smart third term Government would be hestitant about rushing in to defend it, when so many people are unhappy.

Bernard Hickey has done an interesting analysis. National revealed 55% of SPRAC staff earn over $100K a year. He wondered how that compares with other government agencies. Now Bernard could have chosen a lightweight agency such as Youth Affairs to compare to, but he chose the Reserve Bank – can’t get much more critical than that. What does he find:

The Reserve Bank of New Zealand’s annual report shows that it has 221 staff and that 71 or 32% of those are paid more than NZ$100,000. Over 55% of Sparc staff are paid over the NZ$100,000 threshold. There are 25 staff at the RBNZ who are paid more than NZ$150,000 or 11% of staff.

That compares with Sparc’s 16% of staff who are paid more than NZ$150,000. The total remuneration cost for the RBNZ in 2006/07 was NZ$21.8 million or an average of NZ$96,642 per staff member. That’s 24% less than the average for Sparc of NZ$129,411.

So we are paying our Reserve Bank staff 24% less than our sports funding agency staff. Now let us compare their importance starting with the RBNZ:

The RBNZ has the power to destroy or save the economy with its monetary policy and the power to regulate and/or save our banks. Every single bank note we have in our wallets is printed by and managed by this institution. Our payments system depends on it. …

Governor Bollard must front up to the public, politicians and his own board once every 6 weeks or so to explain what he’s going to do with the economy. He is regularly criticised by many commentators (including me) and will be held responsible for the economic life of the nation. The pressure is intense and the stakes are high.

If one of the big four banks were to fail on his watch (which I think is utterly unlikely), he and the bank would be responsible for a national disaster. It would cripple the economy for years. …

The Reserve Bank is an institution integral to the economic life of New Zealand and the Governor is one of the four or five most powerful people in the country. If he stuffs up we all pay.

Yep pretty critical indeed. And SPARC:

Sparc encourages us to take up sport and its CEO is a former international hockey player who once was the head of sales for New Zealand Post, a monopoly. Its success is measured by (I hope) how many of us regularly play sport and are therefore healthier, although Sparc’s Statement of Intent seems not to give any specifics on these or how it has performed recently. If the CEO of Sparc stuffs up it would be a one day story that maybe generates an independent inquiry that ends in a 50 page report that no one remembers.

A fair summary. So the conclusion:

Sparc is not more important than the Reserve Bank, its people should not be paid 24% more than people at the Reserve Bank and we should not be paying more than half of its staff NZ$100,000 to give away around NZ$71 million of public money.

Bernard also has a lot of good stuff on the $18 million SPARC is planning to spend on their websites, on how Trade Me and Staff websites have cost far less than this, and how the traffic to the SPARC sites appears to be so small it is unmeasurable.

There seems to be a very strong case for change.

Ben Thomas at NBR reports on how the Reserve Bank has gambled a massive $4.2 billion on currency speculation in the last year.

This has all been through way of sales of NZ dollars. The Reserve Bank is hoping it can then buy the dollars back in the future when the exchange rate is lower.

I have to say I prefer to do my own currency speculation, rather than have the Government do it for me.

For that long Sunday afternoon:

The NZ Book Council have a very cool website to encourage reading. They’ve done it as a Windows operating system.

Scrubone does a fisking of No Right Turn’s outrage at National over citizen juries. Also on that issue, Russel Norman at Frog Blog agrees with some of my suggestions around Citizen’s Juries – specifically the need for multi-partisan agreement not narrow agreement.

Paul Walker responds to Matt McCarten’s hysteria over the Business Roundtable.

Whale Oil likes his stats comparison with Kiwiblog. Obviously girls and guns work

Craig Foss looks at how Dr Cullen is financing his tax cuts – he is borrowing $6.4 billion and also selling $6.4 billion of financial assets breaking one of his four tests. This last one is particularly cunning as it allows him to claim gross debt remains on track. This si why net debt is the better indicator.

Colin Espiner reviews the Reserve Bank MPS and the polls.

Bernard Hickey believes Alan Bollard has gone soft on inflation, as does the Westpac Chief Economist.

I’ve been going through the data on which the Reserve Bank based their announcement today that they intend to lower the OCR later this year. It is not pretty:

• Inflation projected to hit 4.7% by September 2008 – this will be the highest inflation has been since December 1990.
• Economic Growth to slow to under 1% in 2009
• The lowest level of house sales in 18 years
• A drop in the TWI from over 70 to around 60
• A rise in unemployment from 3.6% to 6%
• A drop in house prices of 13%

I almost pity Bill English who is likely to inherit this. Not as bad as 1990 but nothing like the booming economy Dr Cullen inherited in 1999.

The summary is NZers will have almost big price rises, low economic growth, around $70,000 knocked off the value of their family home, and around 50,000 more unemployed

The MPS noted:

Faced with lower nominal income growth and higher consumer prices, households must decide whether to take on extra debt or lower their standard of living.

What a lovely choice. However the Reserve Bank hints at an answer:

Many households will need to devote a high proportion of their income to debt servicing costs, limiting their discretionary spending. High global food and energy prices will have a large impact on the spending power of households. The domestic prices of these goods will be pushed up further by a weaker New Zealand dollar. The tax cuts and increased transfers announced in Budget 2008 will provide some offset to these rising costs over late 2008 and early 2009.

So further tax cuts would provide further assistance to households facing a choice between extra debt or lower living standards. Labour is crying that further tax cuts will mean cutting of public expenditure. So they seem to be saying that households should cut their standard of living, rather than have the Government cut its expenditure!

Poneke has a vigorous debate on his blog about a BBC story that cast doubt on the extent of global warming, and how the BBC then changed its story.

Bernard Hickey writes on why the Reserve Bank should not yet lower the cash rate. I agree with him that there remain domestic inflationary pressures.

Bridget Saunders has an amusing blog on who are the real men. She names as real men – Richard Sigley, Rodney Hide, Matthew Ridge, Pat Rippin and Dave Henderson. Non real men are Brent Todd, Tea Ropati, Daniel Moyes, Helen Clark and Julie Christie.

Politico look at the possible VP choices for Obama.