Matt Nolan

A cut to the OCR, why?

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Note:  This post is like a personal summary of information from the recent past – given that I have been too slack to write about international events here.  Sorry if it reads like a list 😛

I see that my workplace came out and said that they expect the official cash rate to be cut in June – by 25 basis points to 2.25%.  Unsurprisingly, I agree with the assessment of my colleagues.  However, a large number of other economists – whose views I also have a lot of respect for – believe that a cut is not on the cards, at least not yet.

So why is there a difference, why would a rate cut be justified (or not), and are there red flags to look out for?  Well James Weir answered all these questions in the Dominion Post so I don’t have to 😉

In my mind and in the Dom article, the combination of a persistently high currency (which holds down output and thereby inflationary pressure), low measured inflation, falling commodity prices, a weak labour market, and signs that the recovery in the housing market is not infallible all suggest that the appropriate level of the official cash rate is now lower.

Add to this the RBA’s willingness to cut their cash rate by 50 basis points due to bank funding pressures, the RBNZ’s warning on the OCR, and the fact that monetary conditions have been eased overseas (a primary driver of the relatively higher dollar – the Bank of Japan has been the latest, but lets not forget about the Fed’s willingness to hold rates at low levels until late-14) and I believe (and it seems my workplace does as well) that the “appropriate track” for the official cash rate is now lower, and so the Reserve Bank will be willing to cut to place us on a track that meets its inflation mandate and minimises volatility in the New Zealand economy 😉

It is perfectly reasonable to not agree with this view – and to say that the stimulatory impact of the rebuild in Christchurch and a broader recovery in  the housing and construction markets will see spare capacity get used up, and as a result there is not need to reduce the track for the cash rate.  It is this view that many of the banks are sticking to at present.

Now recent data has seen the market price in an 81% chance of an OCR cut in June, this combined with uncertainty in Europe following the Greek and French elections has seen the dollar fall sharply (the TWI has dropped since the start of last week).  If the currency experiences another sharp downward leg, it reduces the chance of a rate cut – think of it this way a lower currency will stimulate output in New Zealand given current prices, reducing unemployment and the output gap, meaning that the RBNZ needs to do less work to meet their mandate.

Update:  Eric Crampton offers comments here.

Matt Nolan

Missing the point on financial literacy

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I see that Brian Gaynor disagrees with an article written by a work colleague of mine.  Usually I wouldn’t care in the slightest, as when it comes to issues of social justice it is important to get all these important points of view around soical value out in the open.  However, given that Gaynor simultaneously missed the point of the article, and then went on to absolve investors of any responsibility for their patent stupidity in his piece – I felt that I should jot down my thoughts.

There is two things I agreed with Gaynor on, one that Benje Patterson actually mentioned in his article in the first place, and another thing that is patently obvious.  These are (1)  Finance companies provided poor information, were poorly run, and incentive structures were awful (2) the term greed is subjective.

Now, Patterson laid these things down – however, while, according to an interview in Action Alert Plus vs Motley Fool, Gaynor seemed to imply that Patterson was laying all the blame for finance company collapse on investors, he was actually making a much less controversial claim.  He was saying that investors have to take some responsibility for their own money.

Gaynor might not think that people who invested ALL their money in one finance company paying 0.5%pa more than a bank, and then hoping for the government to bail them out if things went wrong were greedy.  However, I’m different – I think this sort of behaviour defines greed.

But it was more than that, if you were trying to maximise your expected return, the decisions people were making were patently stupid.  Many of these people who have been better off to leave their kids sorting out their finances, as they would at least have had to add things up more recently while in class.  Now, Patterson believes, and I agree, that individuals are smart enough to know not to put all their eggs in one basket – and they are smart enough to see that what they were doing is a gamble.  However, a lack of financial education mean’t that individuals didn’t realise all the awesome alternatives that were available.

Patterson’s primary point was simply that, if we had improved financial literacy in recent decades, we wouldn’t have a bunch of people who put all their money in a finance company (which was equivalent to a roulette table).  It was their funds, and they have to take some responsibility for the fact they put the money there.

Now, were these companies immoral, lacking transparency, dishonest etc – hell yes.  Do we feel sympathy for people who were manipulated into losing all their money – hell yes.  Do we think basic financial literacy would have helped the situation – hell yes, that is why people use Goodwin Barrett.

And that is why I find Gaynor’s article so insulting – he is choosing to ignore the fact that people chose to put money in these companies and lost it all, and so he is ignoring one of the clearest, cleanest, and fairest solutions we could put in place in order to prevent this happening again.  In his determination to insult finance companies, he is willing to leave future investors vulnerable to future snake oil merchants – and that isn’t cool.

Matt Nolan

Mar 12: Weak labour market, what’s to be done?

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Although today’s labour market release made sense – it didn’t stop it being negative.

We saw the unemployment rate rise – which was statistic payback for the decline in December, that was due to a drop in the participation rate, which was due to a bunch of seasonal hiring not occurring in the December quarter and as a result those potential employees not entering the labour market 😛

Furthermore we saw hours worked remain weak.  This is consistent with the mix of a high exchange rate and low growth in output – with the dollar reducing the relative price of capital to labour.

All very exciting.  So what should we do.  Do we need to “get the exchange rate down”, “increase fiscal spending”, “print money”.

Well, I’d go back to the traditional economic view and ask “is the interest rate appropriate”.  Recent data is suggesting, in combination with moves overseas, that the official cash rate should be cut.  This is not an example of policy failure – it just shows us how exposed and vulnerable New Zealand is to the financial volatility overseas.

Sadly, as a small open economy this is just the way things are – and the best way we can deal with it is to have an inflation targeting central bank, a floating exchange rate, and a government that is willing to run countercyclical fiscal policy (so targets a balanced budget when they forecast the economy will be back at “potential”).  We have all these things, which has really helped us in recent years.