September 2008 MPS and OCR decision

Hi everyone,

So what happened – I will be in the lockup when this post comes out so I currently do not know whats going on. If you want to see the decision while I’m away go here (*).

Like everyone else, I’m guessing 25 basis points of cuts and a more dovish set of forecasts than June (weaker in the short term, the same in the long term) – as discussed in the preview. Will add to this post when I am back.

Update (9.20am): 50 basis points! The reasons for the cut were funding pressures and world growth falling. This is a mistake methinks.  We do a brief discussion of issues here.

  • goonix

    Well I didn’t expect that.

  • “Well I didn’t expect that.”

    I get the feeling that the Reserve Bank has dumped its inflation mandate (or changed its target to 3% instead of 1%-3%).

    There were a lot of interesting things in the release – I’ll say a bit about them tonight

  • goonix

    Yeah it continues the trend of moving away from its key mandate.

  • adamsmith1922

    Have just heard the news. On first blush it seems concerning. Am I mistaken, but is the RBNZ seemingly reversing some of the stances taken previously.

    Will the major banks lower their mortgage rates, in Australia the banks have been somewhat reluctant to bring the rates down by the extent of RBA cuts.

    One assumes that Kiwibank will lower it’s rates in line with the wishes of the regime.

    Just what jawboning has been going on behind closed doors between Cullen and Bollard.

    This close to an election this is very good for Labour, in the short term, longer term not so sure.

  • goonix

    The decision definitely appears political. A sad day for NZ if this is indeed the case.

  • I’ve thrown the revised inflation numbers into my “calculate the length of the medium term” excel spreadsheet. I use a functional definition of the medium term: over how many quarters must we average in order for inflation outcomes to be below 3%. If we center on the September 2008 quarter, use the RBNZ forecast going forward (and assuming the Sept 2011 quarter rate of 3% continues forever after that), and realized outcomes prior, then the medium term is now 41 quarters: more than a decade.

    I’m sticking by “Impeach Alan Bollard, Impeach Him Now.”

    On the plus side, I got to lecture on Monday about political business cycles; gave them the nice example from the Nixon tapes of Nixon pushing Burns to keep interest rates down in the leadup to the election. Looking more and more like we’ve got a domestic case going on right now.

  • “RBNZ seemingly reversing some of the stances taken previously”

    Same stance as June – however, they believe that lending costs will not fall as much as the OCR, as you state here:

    “Will the major banks lower their mortgage rates, in Australia the banks have been somewhat reluctant to bring the rates down by the extent of RBA cuts.”

    I doubt all the cuts will appear in mortgage rates – the one to watch will be the floating rate, that will tell us how much the Bank’s are currently able to pass on.

    “Just what jawboning has been going on behind closed doors between Cullen and Bollard.”

    “The decision definitely appears political. A sad day for NZ if this is indeed the case.”

    I severely doubt it. I think it has more to do with the fact that Dr Bollards mandate is fuzzy, so he places a fairly high weight on short-term growth – to the determinant of the economy in the long-run.

    There forecasts are a bit negative as well – three years of falling employment levels! What the hell. Of course, they said all this stuff last time so its not as surprising (although still weird):

    http://tvhe.wordpress.com/2008/06/05/june-08-ocr-review-and-mps/

  • “then the medium term is now 41 quarters”

    A touch longer than the BOE 8 quarter long term 😀

  • If you want really depressing, center around the Sept-09 quarter and you get a medium term of 49 quarters.

  • Yikes – like you said, maybe they should just be honest and admit that they aren’t targeting 1-3% 😀

  • Pingback: What’s behind the 50-point cut? « The visible hand in economics()

  • goonix

    Matt – are you saying Bollard is above any political decision-making? I’m not saying it’s necessarily happening, but how can you conclusively write it off as a possibility?

  • “Matt – are you saying Bollard is above any political decision-making? I’m not saying it’s necessarily happening, but how can you conclusively write it off as a possibility?”

    Blind faith in other economists – I’m an idealist 😀