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There was an interesting little shift in the dollar recently – one that was a little bit surprising at first look.
In the past month the dollar has been falling, first as a result of the Canterbury earthquake, then due to the 50bp cut in the official cash rate by the RBNZ. This all makes sense. But then the dollar dropped very sharply from around the 15th of March – this was well after the MPS, and nothing had happened in NZ. What was going on?
There was an interesting comment from Andrew Coleman on a recent post of ours in which he laid out the reasons he sees for government intervention in saving behaviour. As I read it he put forward four reasons:
The first three pertain to cognitive biases that may justify intervention to correct. There is widespread debate about whether such biases warrant intervention and, if so, what sort. However, what I want to draw attention to here is the fourth point: when governments intervene they often give people perverse incentives to take advantage of the system that then require further, costly intervention to remedy. Even if the intervention seems justified it may be that the mechanism implementing it is so costly to administer or enforce that the intervention ends up being costly to society. Read more
Happy St Patrick’s day all.
On this fine day, there is a song I’d like us all to remember – Seven deadly sins. My favourite part of the song goes:
Some say that drinking’s a sin
But a gargle is fine now and then
For drinking has been in this world
For ever and ever amenNo if it wasn’t legal then the lawyers they would sue
And the prison would be full of folks who had a drink or two
And if they didn’t like it then away the girls would run
And if it wasn’t plenty the poor folk would get none
If you’re not sure, have a read over a few more of our posts on the issue(*, *, *). Or for more advice from the Dubliners go here.
See you all next week!
We’ve had the reports back from a few expert working groups now and what was pointed out to me about the tax report, compared to the savings report, is that it had entirely different tax policy recommendations. The Tax Working Group was at pains to align our taxes such that they did not distort peoples’ decisions while the Savings Working Group specifically wanted tax incentives to encourage saving. So who is right? Or can the two views be reconciled? Read more
I’m not sure if today’s rate cut was the right decision – I understand the justification for it, it is just hard to get past my inherent hawkish personality 😉
Still, I think that the rate cut is being slightly mischaracterised by those disagreeing with it – so I’m going to discuss it a little here.
The Reserve Bank cut the OCR 50 basis points today, primarily on the back of the Canterbury earthquake. Their justification was based on a negative national confidence hit, on top of an already weak national economy. This framework was consistent with the thinking of many economists – so even with all this uncertainty, it appears that policy was relatively pick-able this time.
I suspect that they waited to cut at the meeting instead of doing it prior to the earthquake so that they could indicate this was “one-off”, and prevent a sharper drop in the currency and expected rates. However, no-one said that so I’m just guessing 😉
Demand is a nebulous concept, and they cut today as there is uncertainty regarding how heavily “demand” around the economy will drop following the earthquake. Economists will not have a good idea what is going on here for some time – so the Bank should be ready to respond once it is clear that this demand shock has worked through. We will see what happens.