Matt Nolan

RBNZ, NZX and equity markets

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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.

Matt Nolan

What is the RBNZ talking about

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“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.

Matt Nolan

A little bit of risk is a dangerous thing

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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.

Matt Nolan

The week in numbers

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  • An increase in the OCR to 8.25%, on the back of increases in food and oil prices
  • The year end merchandise trade balance worsened to -$6,230m
  • The exchange rate broke through $0.81US this week, just to fall back to $0.78US now.

As most analysts expected, the RBNZ lifted interest rates. They also said they were unlikely to raise them again. The big jump in the merchandise trade deficit was the result of a fall in export value from March, following a fall in Dairy volumes. This isn’t particularly surprising as this quarter often provides low dairy volumes, and high dairy prices had lead to a run down in stocks earlier in the year.

I’m not too concerned about exchange rate movements, except against the AUS.  Have you seen the volatility in NZ$/AUS$ trading today, its been crazy.  I just don’t like volatility, hurts my head.

Matt Nolan

Spending on government employees

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An interesting new blog on stuff tells us why interest rates had to rise. Now I agree that people in the public service are being paid too much (as I don’t work there 😉 ). However, I’m not sure that public sector core wages are the main reason for inflationary pressure (although they do play some part in the wage bargain in the private sector as well). I think that it is a broader issue, with wasteful government spending in health and education the major drivers of our inflationary mess, along with low rates of productivity growth (in both the private and public sectors).

Ultimately, much of the current inflation problem comes from government failure. There is a role for government in society, but I’m not sure that the Labour government recognises the appropriate boundaries associated with that role.

stevedoogue

You don’t mess with the Guv’nor

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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.