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GDP and CPI results provide more worries for the RBNZ

GDP and CPI results provide more worries for the RBNZ

By Roger J Kerr

Who would want to be in Alan Bollard’s shoes right now? Damned if he does and damned if he doesn’t.

As many others have stated over the last three years, implementing the emergency monetary stimulus in 2009 was the easy part (dropping the OCR to 2.50%), unwinding the stimulus was always going to be the hard part.

Based on GDP growth and inflation starting points today being substantially above all RBNZ expectations, he really should be shoving interest rates up now.

The inflation risks and inflation expectations are elevated sufficiently over the next 12-18 months to justify a monetary policy setting on the slightly tighter side of neutral, not extremely loose as they currently stand.

However, Alan cannot raise official interest rates immediately as it will only shunt the Kiwi dollar even higher than its current 30-year highs of 0.8500. Yet again, he is between a rock and a hard place with monetary policy management.

He could argue that the FX markets have already fully priced-in significant interest rate increases and thus if he did lift rates the Kiwi would not necessarily go any higher. That is a pretty bold assumption and not one Alan would want to risk at this point of time. The RBNZ have been heavily criticised in the past for damaging the export/productive sector too much to combat inflation that is supply-side sourced rather than demand related. He will be reluctant to go there.

So, the RBNZ have a real dilemma here, interest rates are too low for an economy growing reasonably well and for an Auckland housing market starting to reflect a shortage of new houses being built in recent years and a shortage of existing housing stock being made available for sale.

It seems the RBNZ will wait for the June quarter’s GDP figures, due out in late September, before being convinced about the sustainability of the stronger economic growth. Therefore, the first increase could well be the 27 October OCR review date. It is too late off course; however he will be hoping that USD strength and global commodity price weakness between now and then will take the heat out of the NZD/USD exchange rate and bring it down. An increase in interest rates when the Kiwi dollar is at 0.7500, rather than 0.8500, should be more palatable for the export economy.

The high currency value at 0.8500 offers other challenges to the RBNZ. Most economists will now be forecasting annual inflation to be above 3.00% in 12 months time, not at a comfortable 2.00% mid-point the RBNZ have been forecasting.

However, how much will the high Kiwi dollar bring down the prices of imported consumer items?

Likewise, how much should +4.50% GDP growth forecasts for 2012 be lowered to cater for USD exporters being non competitiveness above 0.8000?

Tricky questions that I am sure are occupying the minds of RBNZ economists right now.

These will not be the RBNZ’s only worries at this time. If they were not suspicious as to the reliability of their model for the NZ economy before the GDP shocker, they will be seriously worried after it.

The +0.8% GDP growth was not due to any one-off factors - it was almost across all industry sectors. Forestry and construction were the exceptions; however construction will certainly be expanding from here with the Christchurch re-build.

Similar to the 1993 and 2003 recoveries out of recession for the NZ economy, the RBNZ on both those previous occasions under-estimated the speed and strength of the export-led growth and left tightening of policy too late. It may be argued that the circumstances are different today, however not dramatically different.

As has been stated many times in this column over the past 12 months, if you watch the retail/housing indicators as a lead for economic growth, you are watching the wrong things.

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 * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. This column was written before the Monday quake. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

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9 Comments

Economic growth = mumbojumbo

Consumer from th word consumption = someone with TB.

Both are deadly to your well being....

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If you cut away the fluff and the crap you are left with the near zirp RBNZ policies aimed at bailing out the indebted at the cost of the savers. A scam policy for sure. It sits alongside the debasement rort which steals from savers too. What a shite economy.

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"However, Alan cannot raise official interest rates immediately as it will only shunt the Kiwi dollar even higher than its current 30-year highs of 0.8500. Yet again, he is between a rock and a hard place with monetary policy management."

how much legislative mandate does he have to consider the impact on the NZ dollar versus inflation issues?

I thought his key driver was keeping inflation below 3%??? 

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Section 8 of the Reserve Bank Act:

  • The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of achieving and maintaining stability in the general level of prices

    (my emphasis)

    Section 9 policy targets states:

    • (1) The Minister shall, before appointing, or reappointing, any person as Governor, fix, in agreement with that person, policy targets for the carrying out by the Bank of its primary function during that person's term of office, or next term of office, as Governor.

      (2) In the case of a person who is deemed to have been appointed as Governor under section 191(1), policy targets for that person's term of office shall be fixed by the Minister, in agreement with the Governor, within 30 days after the commencement of this Act.

      (3) Policy targets may be fixed for the term of office of the Governor, or for specified periods during the term of office of the Governor, or for both.

      (4) The Minister and the Governor may, from time to time,—

      • (a) review or alter any policy targets fixed under this section; or

      • (b) substitute new policy targets for targets fixed under this section.

       

      My understanding is that the policy target is fixed at a maximum inflation rate of 3% per annum. As far as I'm aware the policy target has not been altered in the name of the currency.

      Thoughts?????

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My thoughts are why do we accept any inflation at all? it's stealing from people that save money, who then get taxed on top of that, such is the complete joke of our tax system.

The target should be -1 to 1%.

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philthy. All money is lent into existence with interest (with the current exception of the US and QE 1 &2).

This might help explain how corrupt the system is

http://www.youtube.com/watch?v=_dmPchuXIXQ

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Got that right Roger, should be going up 50 points next time.

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Why do we insist on trying to control inflation by raising interest rates? Far better to control it by increasing the amount of deposit required to purchase. To control housing just raise the deposit required from 10 to 20% etc. Stop allowing no deposit hire purchase etc.

This way you still slow spending down (if thats what they want) without all the harm done by interest rate rises.

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Because, Gavin, it's too easy for the 'industry' to get around LVR limits. Banks will over lend' to give you the deposit, or secondary loans will be aquired to make up the difference ~  I'm sure you can come up with more ways than I can :) Sadly, hiking interest rates is the only mechanism that can't be stepped around. It 'punishes' all, for the excesses of some. Now, can you see why if interest rates rise, ALL property willl fall, not just entry level ones?

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