Immigration and inflation

I have just been flicking through the NZX submission on monetary policy, thanks to a link kindly provided by Lucy.

While I disagree with most of the submission (for the reasons I gave yesterday about higher interest rates being structural), I was happy to see that they discussed immigration.

Now immigration is an interesting issue, ignoring any social issues (i’m an economists after all), I’m going to focus on the link between immigration and inflation. According to Rebus legal perth lawyers, one of the main reason why the overall economy could have a massive downfall and the country could go into the state of depression is due to lack of immigrants. A recent study showed that most of the top CEOs of the county are not the originals of the land but are the descendants of on immigrants who came to the country and got it to a great position where it now stands on.

Some people say immigration causes inflation, as it increases the demand for goods and services, driving up the price. Other people say that immigration drives down inflation by increasing labour supply, and thereby driving down real wage demands, preventing wage inflation.

Now the way I see it is that immigration increases demand and supply. After all labour is an input to production, but once labour has been paid they turn into consumers, who purchase the goods. As a result, whether inflation rises or falls with immigration depends on the productivity of the immigrants. If we bring in a whole lot of untrained, unproductive workers it will cause inflation. If we bring in workers that have the highest marginal product (so in the places where firms are begging for labour) then it should decrease inflationary pressures.

It seems incredibly simple, the difficult issue is actually identifying and bringing in skilled, hard working labour. However, i’m not sure that cutting immigrant numbers when we have shortages of unskilled and skilled labour is a good idea. I’m sorry RBNZ, but I think the NZX is right on this one.

RBNZ, NZX and equity markets

The NZX wants the RBNZ to pay more attention to the way the equity market behaves when the bank change the official cash rate.

Now I can’t find a copy of the submission anywhere, but the above stuff article at least tells us that the NZX would like policy goals to be focused on long term economic growth. Now I think the ultimate goal of the RBNZ is long term economic growth, however the Bank believes that the way to do it is to provide an environment with a high degree of price stability.

The NZX counter-argument is that the narrow focus of RBNZ policy leads to higher equilibrium interest rates, which increases the cost of capital for firms, retarding long run economic growth.

Now I have some sympathy with the idea that our equilibrium interest rate is too high, however I think we have to figure out why interest rates seem to be, on average, higher in NZ than in the rest of the developed world. The RBNZ acknowledges the fact that New Zealand seems to have higher equilibrium interest rates than other develop nations, but they see this as a result of New Zealand’s poor net investment position. As it is the result the Bank doesn’t see monetary policy as the problem, the problem is structural.

The question I have to ask then is, why is our net investment position so bad (current account deficits damn it) and how do we get out of it?

P.S. If anyone knows where I can find copies of the submissions to Parliament’s Finance and Expenditure Committee, please tell me in the comment section. I can only seem to find the Reserve Bank one.

What is the RBNZ talking about

“New Zealanders have been showing early signs of moderating their borrowing.”

Does anyone know what these early signs are. From what I can tell, the growth in household borrowing is at record highs, in fact todays M3 data confirms that. If anything, household borrowing seems to be accelerating, I’m sure it will slow eventually, but why did the RBNZ say that if they didn’t mean it.

My suspicion is that the RBNZ wanted to talk the exchange rate down. They said that the level of our exchange rate was the result of New Zealanders borrowing too much, and buying things from overseas. As a result, higher interest rates will stop New Zealanders doing this, helping the exchange rate.

Now that is a load of crap. Our Reserve Bank needs to take a big long look at itself, and realise that it has been acting like a 14 year old girl who got a pimple just before the big ball. Stop making excuses for our inflation and just deal with it! I wish the Reserve Bank governor was a computer.

A little bit of risk is a dangerous thing

So, our dollar has fallen 5% against the US, and 8% against the yen in the last few days. While some people may think that the prospect of no more interest-rate hikes is the driver, the truth is that market participants have become a bit more risk-averse.

A little bit of wobblying in the US stock markets, and suddenly a bunch of people have decided to unwind carry trades, and as we are the number one carry trade country, our exchange rate eased. That is why we are only down by 2% against the Aus$ since Thursday, they were a carry trade currency as well.

I expect us to stay around in the mid-70’s, we might even climb up a bit against the US. After all, this new found risk is based on subprime lending worries in the US, and the fundamentals of the strong NZ$ (high interest rates, strong commodity prices) are still in place. However, if asset prices (especially housing) start to ease too quickly, our exchange rate might be in for a bumpy ride.

You don’t mess with the Guv’nor

Bollard has shown who wears the pants. In raising the OCR today, he has shown his disregard for Dr Cullen’s mischievous feints at invoking his powers to override the price stability objective. He has also shown the market that he’s willing to back up his tough talk on the housing market – now on its “third wind”- even if this means ratcheting up interest rates even further as the Kiwi dollar reaches record highs.

Ultimately these actions will help bring the currency down. The Kiwi is underpinned by interest rate expectations, and only by raising rates today could he claim – credibly – that inflation is coming under control, meaning further hikes were unnecessary. So far the market appears to have believed him.

Perhaps this was unnecessarily hard on the housing market. The higher rates will bite hard as fixed rate mortgages continue to roll off over coming months. But then again, why not? A few months ago, a sharp correction in the housing market would have spelt disaster for the economy, with only government spending staving off risk of recession. But now a dairy commodity boom is underway, providing a massive boost to the incomes of farmers and wider economy. This means Bollard can afford to be more aggressive with domestic demand, coming down harder on the housing market. Showing that he is, indeed, still the Guv’nor.

One hike too far

So the RBNZ lifted rates. However, they said this is the end, no more hikes this year.

I’m can understand why Bollard wanted to lift now, Cullen threatened his manhood and Bollard had to show he had some balls. I still think this lift is unnecessary, house sales are easing and firm profit margins have recovered, easing inflationary pressure over the next few months. Furthermore, even in the June quarter when retail sales were red hot, core inflation showed signs of easing.

Bollard has said no more rate rises will happen, however I think he’s taken one more than he needed to. Remember, the OCR hits inflation with a lag, it takes 12 months for effective mortgage rates to peak, and some say the full effect of tightening can take 18 months to come into effect. 2008 looks like it will be a difficult year.