Really? We have just come out of an enormous housing bubble, and even with recent house price declines houses are still (according to most objective measures) massively over-valued.

On the construction side there are massive problems – but that stems from credit rationing in a specific market. If banks are appropriately managing risk here then there is nothing for the RBNZ to get involved with.

“Whilst I agree that Aussie’s terms of trade will fall more than NZ’s, we can’t lose sight of the fact that Aussies rose about 3 times as much as ours in the first place. On a relative commodity basis NZDAUD should be trading at about 70c.”

Indeed it did – however, the change in interest rates is a reaction to a negative shock, and the fact is that the negative shock is larger for them than it is for us.

I think that the reality is that the RBNZ’s decision is more complicated than just looking at the relative terms of trade. To name but one factor, I’d point to the dynamics in the NZ housing market has justifying a policy response that is at least as aggressive in magnitude and rapidity as that in Aussie.

As far as Thursday is concerned, I’m not especially interested in the RBNZ’s forecasts right now. I’m far more interested in the forecasts that are coming from offshore. Ultimately they will drive the RBNZ’s forecasts with a lag in my view.

PS Whilst I agree that Aussie’s terms of trade will fall more than NZ’s, we can’t lose sight of the fact that Aussies rose about 3 times as much as ours in the first place. On a relative commodity basis NZDAUD should be trading at about 70c.

I would agree that we had more downward momentum.

However, I would note that potential growth in NZ is still lower, and monetary policy has to take account of that.

As a result, the appropriate margin for comparing the relative size of the interest rate cuts must stem from the factors that have changed for the relevant economies.

The fact is that the Aussies terms of trade faces more downside risk than the New Zealand terms of trade from recent events – if the change in the TOT is the main driver of both Bank’s decisions, then the relatively bigger decline in Aussie implies that there will be a bigger cut to rates.

Of course, I think that a TOT shock also counts as a “supply side shock” – as it implies that we can get more imports for the same level of domestic capacity. If this is taken to be the case (which I don’t think either of these central banks do) then I can’t make any sort of relative comparison.

Ultimately, I think a good rule of thumb is that the RBNZ will try to keep the interest rate gap constant – this gives us a 125bp cut.

The main thing I am interested in now is the forecasts – and how they justify what is going on. I am surprised that the Aussies did not mention falling petrol prices at all – this is an issue for our RB!

Congrats 😉

Did no-one else pick 100?

There rate of growth in potential output is also higher – so just because their economy will grow faster does not mean that we should necessarily follow.

The key is the relative change in the terms of trade – if our terms of trade is not going to decline as markedly as the Aussies then there is no reason to expect as large a cut.

Secondly, it isn’t clear that there monetary transmission path is quicker. There was an argument that New Zealanders fixed on longer terms would slow down the transmission path, but the Bank found that this argument was exaggerated:

http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008jun71_2sethi.pdf

Effective mortgage rates are now reacting more quickly (as average fixed mortgage rates have come down), so even if this argument held weight before, it is not so appropriate now.

The 100bp cut makes 125bp by us the most likely – but without a clear idea of how the RBNZ thinks that the change in world demand will hit the TOT it is hard to tell exactly what they will pick