“I shan’t be so agreeable”

Excellent 😀

“suggesting that the much faster rate of increase of non-tradeables prices in NZ is not due to peculiarly local factors – it is due to more global, or at least Australasian factors”

Of course the labour markets and general political settings in both countries will share distinct similarities. I suspect that these two would be the major drivers of non-tradable price growth.

“The key to getting inflation down is not to engineer a smaller rate of relative price shift”

I completely agree – the relative price movement is structural and not of concern for monetary policy directly. I think the Bank believes that is what it is doing fundamentally – as the headline rate does track marginally within the band 😉

My main concern is how this functions in the face of a “shock”. Non-tradable price growth is invariably “stickier” than tradable price growth, so if conditions change sufficiently overseas and we begin to import inflation it will be extremely costly to get the non-tradable rate down. Surely in this case it would be better to ere on the side of caution with the headline target in order to ensure that non-tradable growth is weaker.

“Incidentally, how long do you think it will take before someone tries to sue the government and the Reserve Bank because the policy target agreement is not consistent with section 8 of the Reserve Bank Act”

The same argument will appear that always appears – CPI growth overstates “inflation” due to measurement issues and improvements in quality that aren’t captured. As a result, a target of “2%” gives us “price stability for a given level of quality”.

It would be interesting to see some actual work on this though. Is 2% the right number? Is it even the implicit inflation target anymore 😛

According to Statistics New Zealand, average non-tradable prices increased by 63 per cent in the fifteen years to June 2006, or 3.3 per cent per year, while average tradable prices increased by only 16 per cent, or 1.0 per cent per year. This obviously reflects a large relative price movement – but one that is almost the same as in Australia. The key to getting inflation down is not to engineer a smaller rate of relative price shift, say by reducing non-tradeable price increases from 63% to 50% while keeping tradeable price movements at 16%. The key is getting both numbers smaller : say 53% and 6% respectively. Only in that way will the value of the dollar be preserved from the evils of “low” inflation.

Incidentally, how long do you think it will take before someone tries to sue the government and the Reserve Bank because the policy target agreement is not consistent with section 8 of the Reserve Bank Act (1989)- that the primary goal of the bank is to achieve stability in the general level of prices? Over a typical 80 year lifetime, 2% inflation implied a 5-fold increase in prices, and it is stretching the language to think that this is consistent with “stability in the general level of prices”. Ever since returning to NZ I have been bemused that the Minister of Finance (s) have been able to sign off the PTA with neary a protest that it is probably not legal. But, not having any legal expertise, I wouldn’t even know how to begin a high court injunction (or whatever) to question whether it is actually legal to have a PTA of 1-3% in the medium term, without changing section 8 of the Act.

@Eric Crampton

Our high cash rate in the past didn’t necessarily mean high interest rates – we are a tiny open economy, our interest rates were still very determined by the world interest rate. In the end though, our interest rates did get to high levels – albeit not as high as the cash rate differential would suggest

The increase in our debt levels has seemed quite unsustainable. I don’t know of an economist who would expect us to go back to our pre-crisis trend, solely on the basis of this.

This cycle, New Zealand’s neutral is expected to run in line with Australia’s – even though the implied TOT boost from spot prices for NZ is a lot higher (we are at pre-crisis spot levels, Aussies have only recovered about 30%). According to the RBNZ the change in the implied OCR stems solely from an unwillingness of foriegn lenders to give us money, not a change in consumer risk preference. As a result, NZ domestic interest rates should head to high “effective” levels.

Ultimately, even with the OCR at 8.25% nominal consumption as a % of GDP remained about average levels. This implies to me that consumer spending was neutral with a very high cash rate, this could mean two things:

1) In NZ the OCR is ineffective at setting interest rate,
2) NZer’s willingness to borrow is high.

It will be a while until we can properly judge which hypothesis is correct given the significant holes in NZ data.

I still am surprised at how high NZ’s interest rates need to be to keep inflation on target. We currently have the overnight rate target at 025%, and 5-year closed mortgages around 4.5%.

Bound to be something wrong when economists agree. At least the RBNZ obviously does not agree with us.

Agreed on all fronts.

Non-tradeable is sticky, sure. That means it’s the one that needs longer term battering down.