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.