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OCR unchanged

Written By: - Date published: 11:37 am, June 5th, 2008 - 14 comments
Categories: economy - Tags: ,

The Reserve Bank has left the Official Cash Rate unchanged; no-one expected a rate cut this early.

It’s encouraging that Bollard has firmly signalled that interest rates will be coming down this year despite projected inflation reaching 4.7% in the September Quarter. There’s no use in the Reserve Bank strangling our economy with high interest rates when the inflation we are experiencing is coming from offshore in the form of high international prices for oil, food, dairy, and metals (underlying all of this, of course, is peak oil). In signalling rates will come down despite the inflation figure, Bollard is moving the Resave Bank away from a myopic, useless fixation on inflation and taking the overall interests of the economy and growth into account. After all, that’s what Australia does and they’re getting on just fine despite having 4.4% inflation.

No doubt, National and its allies will claim that Labour’s tax cuts were too large and prevented a rates cut but remember the Reserve Bank was expecting tax cuts of $1.5 billion this year, that amount has been in its model for a year, and that’s exactly what the Government has spent, so the government has hardly shocked the RB into not lowering rates. There was never going to be a rate cut this early.

So, no interest cut this time but a cut later this year. Politically, that’s going to be good for the Government tax cuts, higher Working for Families payments, lower mortgage payments, and higher benefit payments(?) all coming on-line before the election. But, more importantly, it’s good for the economy that the Reserve Bank is taking a realistic approach to international inflation and is prepared to lay off fighting inflation for the overall health of the economy.

14 comments on “OCR unchanged ”

  1. Lampie 1

    bugger

  2. burt 2

    Inflation seems to peak every time Labour win an election, funny that.

    http://www.rbnz.govt.nz/keygraphs/Fig1.html

    Seriously though, the predicted growth in unemployment (rising to 6% ?) is bad bad timing for the election. I reckon Labour should have pulled an early swift one on us about 3 months back. The economy has moved out of phase with the election cycle. The ship is listing badly. Call a snap election and save some crew while you can, let National ride the worst 3 years of the storm thats breaking. It’s inevitable, don’t be a passenger.

    Interesting the reserve bank can signal two interest rate drops before the end of the year.

  3. Anthony 3

    The whole economy is going down the gurgler. The Labour-led government’s 9 year spending spree is coming back to bite all Kiwis.

    If any of you work in government departments you’d better start getting your CVs ready, because once the crap hits the fan you’ll be the first to go.

    Bring on the revolution baby, National are going to steam roll this bloated, wreck of a government.

  4. IrishBill 4

    How old are you Anthony? It’s just you don’t seem old enough to remember what a real economic crisis looks like. I’ve seen a few of them and they don’t include record low unemployment, projected growth and a government with a surplus on hand to spend stimulating the economy. Even a technical recession isn’t being forecast by most people. Perhaps I just have a better memory than you.

  5. burt 5

    IrishBill

    So have we got this correct, record unemployment was the result of Labour policies but the current increasing unemployment is the result of external factors.

    Like inflation and high interest rates, the bad things are never caused by the govt and the good things are always caused by the govt – how old are you?

  6. randal 6

    burt has problems with logic. it is possible for employment and unemployment to be affected by more than one variable.

  7. IrishBill 7

    Burt, the current increase in unemployment is small and has not been matched by a similar increase in unemployment benefits. Add to this the highest birthrate in nearly two decades and the fact that the drop in employment participation has been greatest amongst women and I’d say we are seeing more people choosing to stay at home and have kids or look after the ones they already have.

    That is something else you don’t see in a bust.

    The high interest rates are certainly the fault of the government in that they should have changed the reserve bank act to allow for particular hotspots in the economy to be dealt with on a case by case basis rather than the one size fits all of the OCR but from what I hear of Cullen’s remarks on the matter last night, and from what I’ve heard out of the select committee hearing into it, I think there is little political will to do so.

    From what I see we are definitely heading into a slowdown but we are doing so in a fiscal situation that allows for stimulus such as tax cuts and increased government spending to make sure we don’t bottom out. Personally I would have put less into tax cuts and more into infrastructure spend as it is a more precise way to stimulate the economy and it ensures greater productive capacity in the next upturn. I get the feeling Cullen would feel the same but had too much political pressure for tax cuts.

    If you read the OCR report put out with today’s rate announcement [PDF] you will see that international food and oil prices are clearly the reason for our current inflation levels and this is, in my opinion, another area in which Labour has not done as well as it could have. If more political will had be exercised in terms of rail, alternative energy and energy conservation and landcorp properties had been switched to sustainable food production rather than dairy and forestry mono-culture then we might be in an even better position to weather this downturn.

    The problem is National would exacerbate the worst parts of our current governance while removing the good parts. I base this analysis on the little they have said and on their historical record. I would be happy to be proved wrong.

  8. vto 8

    IrishBill:

    “From what I see we are definitely heading into a slowdown ”

    Not being a smart-arse but do you live and work in Wellington? Because mate this ‘slowdown’ was here a while ago. It has already slowed down and from what I see the bottom of the cycle scavengers are doing their deals right now. This slowdown has been going since late last year and kicked in as heavy as I’ve seen 2 or 3 months ago. (imho it will be shortish tho).

    Both the peak and the trough always pass before the vast masses realise.

    I have maintained over the last couple of cycles that those in Wellington see things too late. (Perhaps a result of being removed from the coal face in that isolated part of the country called the capitalality.). Both Brash and Bollard have reacted too late and too heavily.

    I maintained last year that the then lifting of interest rates was unnecessary as the cooling was about to happen anyway. I think Bollard has caused an unnecessary amount of hardship.

  9. burt 9

    randal

    The only logic I have a problem with is that all good things are caused by Labour and all bad things are caused by National or external factors.

    I’m learning that although we have had a Labour govt for nearly 9 years, todays high interest rates, low wages and stagnating growth were caused by the failed policies of National in the 90’s. To me this defies logic and reason and also consigns Labour to the role of a caretaker riding a predetermined path laid out by National.

    I’m also learning that international crisis cause crisis here but global stability has no impact in the same way global periods of sustained growth have no effect. It’s taking me a while to work out that global [ good things ] don’t effect us, rather Labour simultaneously through prudent management creates the same for us here in NZ. It’s a shame Labour can’t just magic the good things more often, when they are not also happening elsewhere. If they could they could turn these uncertain times into boom times for us couldn’t they.

    How’s my logic now?

  10. IrishBill 10

    vto – I do live in Wellington but I have also spent a lot of my life in the provinces and am well aware that they are often the last to feel a boom and the first to feel a bust. Having said that I think I’ve seen enough cycles to get pretty good feel for where they are at and I think we are only just heading into this. In my opinion we will see a longish but not too deep trough led by the US (it will be a long time until that economy is back on its feet) but ameliorated by the current health of our economy.

    My fear is that too much capacity for stimulus is being frontloaded into tax cuts and my other fear is that we get a National government in power and that that government exacerbates the contraction by putting too much money into top bracket tax cuts (and subsequent high end discretionary spending which tends to be import focused) and pays for it by cutting govenment spending. If they follow previous patterns they would then try to increase “productivity” by lowering low to middle income wages and increasing unemployment. No money for guessing what I think about that.

  11. AncientGeek 11

    burt: It is good to see that you consider you are able to learn. I haven’t seen many signs of it myself. You just seem to be overwhelmingly negative to me.

    Of course if you’d care to look at what is happening with employment offshore over the last year since the sub-prime loan problem increased an existing international trend towards recession, you’ll see exactly how well off we are. I’d be worried if the unemployment didn’t go up during times of economic change. That would indicate a artificially static economy where people weren’t moving to new jobs and industries.

  12. Eddie 12

    I want to know if any Governor of the Reserve Bank at any time in its history has said to unions representing workers: “Yes! Now is a great time to negotiate higher wages, you go for it!”

  13. Anthony 13

    IrishBill – heres my introduction, I’m 32 and I only pay 7c in the dollar tax across 110k of income. Got sick of the government helping itself to my pay, so I restructured. If National get in, its good news for me, if Labour get in, I simply get another property and get my tax down to 0c in the dollar. I’m sick of being penalised for working hard.

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