http://www.westpac.co.nz/olcontent/olcontent.nsf/content/FM_Bulletin_200
80605/$FILE/RBNZ_MPS_Review.pdf

“I think we’re in for a hell of a correction.”

We are in for a large correction – but obviously the income is still there even in the RBNZ’s case, they just have people increasing their savings markedly. What’s driving that?

Furthermore, the terms of trade reversal they have just seems over-cooked (given that it stems from a reduction in export prices) – you take that out and the picture would improve significantly.

Moles in other sectors of Wellington give the impression of a Wile E Coyote treading air over the canyon. I think we’re in for a hell of a correction.

http://www.westpac.co.nz/olcontent/olcontent.nsf/content/FM_Bulletin_20080605/$FILE/RBNZ_MPS_Review.pdf

One thing to remember with that is that business’s are probably looking at the level of employment rather than the unemployment rate. Strangely enough there is a significant difference.

Businesses may feel that we have a situation where employment levels need to fall. No even if this is the case at an aggregate level, the most likely places there will be reductions in employment are through part-time earners.

As many part-time earners are students or secondary earners they often do not become unemployed when they lose their job, they “leave the labour force”. If this is the case we would expect a decrease in the participation rate to pick up a significant amount of the decrease in employment.

An unemployment rate of 7% will also come with a significant (e.g. 5 percentage point) decline in the participation rate – suggesting that there would be a much more significant decline in employment.

As a result, I find even the 6% level unrealistic.

I would note though that the Bank’s interpretation of their mandate now is just “aiming to have projected inflation comfortably within the target range over the latter half of our three-year projection period” (p7 of today’s MPS). So effectively, if it’s back under three some time in the distant future they’re OK.

Just download their Jun08 excel sheet, then plug in a new column that’s nothing but if statements on averages:
=if(average(E52:E74)<3,23,if(average(E51:E75)<3,25,…..)
Centred around current quarter: the medium term is 37 quarters if we define the medium term as being that period of time necessary for inflation to be within the 1-3% band.

The largest prior window was 13 quarters back in September-December 2005.

If this is not grounds for immediate dismissal of the Reserve Bank Governor, then the whole thing is a complete crock. To paraphrase DeLong, Impeach Bollard. Impeach Bollard Now.

Agreed – I can’t see annual price increase settling below 3% over the next five years given this sort of Reserve Bank action. Did someone say policy failure?

“We don’t really need to worry much though. There’s no literature whatsoever suggesting that central bank credibility is important. Any reports to the contrary are just ideological burps coming out of strange macroeconomists and can be ignored.”

🙂

Don’t forget what the RBNZ said just today – “inflation expectations are anchored” 😀