Crisis and policy: A couple of notes on NZ policy

Christchurch has had an earthquake, and this has lead to the discussion of a couple of policy issues.  Lets discuss.

RBNZ will likely cut the OCR.  However, I can see them waiting till their meeting – so they can fully explain what is going on.  The reason this matters is:

  • They will want to cut to help restore confidence – the demand element of the shock, not the supply/capacity element.  As a result, they will want to explain how they will reverse policy, and why they are doing this (in order to avoid overreaction).
  • They may want to manage expectations with regards to the exchange rate and other nominal variables – a sudden cut, without a full set of forecasts, may not be the best way for the Bank to say “hey, we are cutting rates now but will reverse this emergency cut once consumer confidence has stabilised”.  With their MPS so close, they must have decided to wait – or perhaps they have decided that the impact on confidence will not be sufficient to justify a cut.  We will have to wait and see.

“Rebalancing policies can be poorly timed too”.  On Twitter Alex tweeted “the basic issues on imbalances nz faces are as relevant today as last week key says”.  However is this really true?

In part it is, we are still in a position of deficient demand and so it is still a poor time to be instituting these sorts of structural issues.

What do I mean?  Well, the point of “rebalancing” is shifting NZ away from consumption towards exports and some types of investment.  I don’t really agree with everything that has been said, but if I did there is an issue – why are we aiming to knock down consumption when we already have weak domestic demand and elevated unemployment.  Even if the structural change is right in the long-term the transition path matters – and ignoring it will merely lead to a repeat of the mistakes of the late 1980 and early 1990s.

Why do I say mistakes – well because many of the policies instituted during this period were technically “right” but the timing was poor.  When unemployment is near normal levels, and economic activity is back towards trend, THEN we can think about structural change – introducing such change now will simply exacerbate a cyclical slump.

  • Horace the Grump

    I agree with your assessment… also Key is right… but timing is the issue..

    The RB needs to be careful to place any rate cut in the right context of supporting the NZ economy through the quake shock, however, they have to be careful. Once the rebuilding starts there are likely to be shortages of labour and possibly materials which will drive inflation, so the explanatory path needs to be laid bare now.

    Its also a quirk of accounting that rebuilding will boost GDP, but there could be other knock on effects from ex-Cantabrians relocating to other parts of the country… but that doesn’t excuse putting structural issues to one side… they haven’t gone away and still need to be addressed.

    But when is the question… my pick is after the election… we have a few months of everyone getting back to business, then the RWC, then the election – there are lots of excuses not to do anything…. and I suspect that Key will want to see a fairly strong mandate to get this process going… I guess we will hear a lot about structural reform in the election period.

  • Hey just wanted to send our thoughts to everyone over in NZ, i admit I forgot about this site or would’ve posted sooner. Got some friends out in Auckland that were relaying the news over to us! Horrible!