In This Edition: Dr Don Looks On The Bright Side
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Sludge Report #102
Dr Don Looks On The Bright Side
Unsurprisingly, as appears to be his mantra, New Zealand’s ultra-cautious central banker Dr Don Brash has again chosen
to do nothing in his latest Monetary Policy Statement out today.
Rather, again we have more of the familiar “jam tomorrow” analysis that has recently characterised Dr Brash’s tenure at
the helm of the NZ economy, and a decision to leave the Offical Cash Rate at 5.75%.
In the MPS report, on the basis that residential investment is expected to pick up in the near future it is assumed that the NZ economy is doing okay.
Similarly on the basis that business investment is expected to make gains in the June and September quarters, the bank considers there is no need for it to provide some assistance
in the form of a rate cut.
Meanwhile we are all asked to forget about the risks that the global economic slowdown and energy crisis might have a
detrimental affect on the NZ economy.
At the foundation of its analysis, the Reserve Bank is assuming a bounce back in the economy in the June 2001 quarter.
While no figure is explicitly stated in the actual report itself, in his press conference the Reserve Bank Governor said
the bank’s pick for the quarter was 0.8%-0.9%.
(It is worth noting at this point that the bank got its March quarter GDP prediction very wrong. Whereas in May 1.5%
growth was expected for the first half of 2001, now just 0.8% growth is expected after a flat first quarter.)
Of course there is no actual evidence that this growth has in fact happened – but on the basis that the jam is coming
then the bank’s approach might be said to make some sense.
And in fact there is recent evidence that the NZ economy is picking up the pace a bit.
Low unemployment levels, rising housing consents (note: consents are not actual houses but only plans to build houses),
wage and salary survey information, retail sales figures, business and consumer confidence and job adverts data all
However, Sludge would be remiss not to point out that even if the bank is right that the second quarter has seen a
marked pick up in pace, the annualised growth rate for calendar 2001 is still only 1.7%.
And this does not exactly indicate a go-for-it economy. Nor is it a very good justification for doing nothing when all
the rest of the world is cutting its interest rates.
To use the motoring analogy that our Reserve Bank is fond of using itself, the NZ economy at present might be said to be
in first gear, bunny-hopping up a hill. Not quite stalled, yet anyway.
And, in Sludge’s view, this is in large part due to the fact that the Reserve Bank has still got the hand brake on.
The lack of rationality behind NZ’s present 5.75% official cash rate is most apparent when international comparisons are
In the US growth rates have been falling for some time, though not yet nearly as low as NZ’s growth has already fallen.
And yet their equivalent to NZ’s cash rate, the federal funds rate, is now 200 basis points lower than ours.
Meanwhile even Australia, singled out by Dr Brash as NZ’s only trading partner that seems to be doing okay, has a cash
rate 75 basis points lower than ours.
So here we have two economies - both of which have been doing a lot better than ours of late, and both competitors for
investment dollars - and both of which now have substantially lower interest rates.
Meanwhile, in its MPS report the Reserve Bank is expecting a bounce back in business investment in NZ.
In light of the fact that it is cheaper to invest just about every where else but NZ, is this realistic?
Sludge asked the governor about this in his press conference and received a non-committal reply to the effect that
business investment decisions tend to be made on the basis of local conditions, not international comparisons.
But even in this assumption the Governor is probably on thin ice.
As so many NZ companies are now foreign owned, decisions on business investment in NZ are often not made on the basis of
local conditions at all (even if they are made in NZ), but rather on the requirements of the overseas parent company to
have the necessary readies to pay its interest bills.
Reminded of this, Dr Brash appeared to agree in principal that this was the case, not that it made any difference to his
Following the last GDP outcome it was pointed out by several commentators on Scoop that the domestic economy has been in
recession for four out of the last five quarters.
In light of this it was argued that NZ might have reasonably expected the bank to cut the OCR more aggressively than it
Unfortunately, this sort of analysis does not impress the Reserve Bank, which in its MPS barely discusses the domestic
recession, instead focussing on recent signs that there has been some improvement in household spending.
In fact, according to one bank official in the lock up, the March Quarter GDP figure is in fact questionable.
And, says Dr Brash, if the bank was looking at the domestic economy alone it might even be considering raising rates
even higher at this juncture.
As one media colleague at this morning’s lockup pointed out. Low growth and high inflation – NZ’s current conditions –
normally ought to be considered rather disastrous.
In the final analysis the Reserve Bank’s approach at present is possibly best characterised by the Monty Python song “ Always Look On The Bright Side of Life”. And bugger reality.
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