>Date: Wednesday, 20 March 2002
>
>Sludge Report #134 - Dr Don Spots A Dark Cloud
>
> In This Edition: Dr Don Spots A Dark Cloud Behind The Silver
>Lining
>
>NOTE: Authors of this report will be anonymous and wide ranging,
>and occasionally finely balanced. Indeed you are invited to
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>published as and when material is available. C.D. Sludge can
>be contacted at sludge at scoop.co.nz. The Sludge Report is available
>as a free email service..Click HERE - http://www.scoop.co.nz/mason/myscoop/
> to subscribe... Sludge Report #134
>
>Dr Don Spots A Dark Cloud Behind The Silver Lining
>
>On a morning that when the Federal Open Market Committee has
>decided unanimously to maintain near record low interest rates
>at 1.75%, the New Zealand Reserve Bank has decided to raise rates
>by 0.25% to 5%.
>
>Cynical observers may note that as the Federal Reserve led the
>way down last year, NZ Reserve Bank Governor Dr Don Brash was
>consistently behind the play, and that now the post 911 blues
>are starting to dissipate, Dr Don today lead the world with his
>decision to take rates back up again.
>
>They might also note that whereas in the US the 40-year-low in
>the Federal Funds Rate is described as 'accommodating', here
>in NZ (the land of high interest rates) our 5% Official Cash
>Rate is described as 'stimulatory'.
>
>Meanwhile the explanation for why Dr Don believes a rate rise
>is necessary today , at least in this observer's view, falls
>far short of satisfactory.
>
>Essentially the answer is that Dr Don and the RBNZ gnomes believe
>Inflationary pressures are not abating.
>
>Note they do not say they are increasing, but just that they
>might increase if he doesn't do something to stop them.
>
>To wit, Dr Don says:
>
>'... if things evolve as now seems likely, there will be a need
>for higher interest rates if inflationary pressures are to be
>contained...
>
>...indications are that pressures will grow further in the absence
>of some increase in interest rates...
>
>...the risk is that this prolonged period of inflation near the
>top of the inflation target may lead people to adjust their inflation
>expectations upwards, making the task of controlling future inflation
>more difficult...'
>
>So in other words, it's our fault. Thought so. Albeit not for
>anything we have actually done, but just for something we might
>do but for Dr Don's gentle persuasion to the contrary.
>
>In the circumstances it pays to look at Dr Don's analysis of
>inflation more closely to find out what's really up in the back
>rooms at No. 2 The Terrace.
>
>As students of NZ monetary policy will be well aware, according
>to his empowering legislation the only ball that Dr Don has to
>watch is the inflation rate, and then - thanks to generally accepted
>wisdom - he only has to watch this in a crystal ball. This is
>because some economic theory indicates anything the RBNZ does
>now will only affect our behaviour 18 months out.
>
>I suspect the good Dr might find it illustrative to test this
>theory by interviewing some Naenae housewives.
>
>He might for example, since he appears to be so concerned about
>the price of vegetables, ask them whether an extra $30 a month
>on the mortgage today will have any impact on the quantity of
>vegetables they purchase in November 2003?
>
>To be fair, Dr Don points out in his analysis that vegetable
>and fruit prices are largely up due the weather, and he also
>observes that another component of inflation, petrol prices,
>is largely out of his control.
>
>He then provides 15 separate tables of inflation measures a
>moving target is always harder to hit - before concluding, '...there
>is no conclusive evidence that the persistent elements of inflation
>are accelerating but nor are there any signs they are falling
>away...'
>
>Another gem in the bank's analysis is the glib conclusion that
>the introduction of income related rents by the Government last
>year 'distorted' in the inflation rate by lowering it 0.6%.
>
>Consequently the fact that the December CPI outcome of 1.8% was
>remarkably close to the target level of 1.5% is a piece of encouraging
>news that we should not put too much store in. Note there is
>no discussion here on whether the 'distortion' created by removing
>artificially subsidised market rentals (subsidised via the accommodation
>supplement - which is presumably not a distortion but rather
>a market mechanism) in state housing will have any secondary
>impacts on lowering rental inflation generally throughout the
>market.
>
>The report then dismisses the fact that the December Quarter
>showed non-tradable inflation (the bit the Reserve Bank has an
>influence on ) at just 0.9 % well inside comfort zones saying,
>'this annual percentage change is considerably lower than the
>rate seen through late 1999 and 2000 but was pushed down by the
>rental policy change. The annual tradeables ex-petrol series
>and non-tradeables ex rents series are both considerably higher.'
>
>One can only presume therefore that now petrol prices are back
>on the way up again that the Reserve Bank will ignore the impact
>this has on the inflationary outlook to.
>
>Also starring in the inflation analysis of the RB's gnomes is
>the impact of immigration.
>
>On the negative side (inflation wise) this is likely to increase
>pressure in an already increasingly bouyant property market.
>On the positive side however the influx of skilled migrants is
>relieving tightness in the Labour market, reducing the pressure
>for wage inflation.
>
>Readers will find it far from surprising to learn that Dr Don
>prefers the former of these arguments to the latter.
>
>On the question of whether the Labour market is loosening his
>report notes: '...the cause of the decline [in job ads] is
>not entirely clear. Recent inflows may be making jobs easier
>to fill. While fewer job ads might signify weaker labour demand,
>this was not borne out by the sharp rise in employment in the
>December Q. A rebound in job ads in February might suggest that
>the reduction in labour market pressure was temporary...'
>
>'..Many of our business contacts continue to note substantial
>difficulties in locating the right kinds of staff, particularly
>in some rural regions of the country.'
>
>So in other words, in this instance at least the Reserve Bank
>prefers to follow its nose than the numbers. Economically speaking
>it is worth noting that the Reserve Bank has no beef with more
>people finding jobs, just with them asking to be paid more.
>
>The bottom line of all of this analysis which might be reasonably
>compared to the proverbial debate on the number of angels on
>the head of a pin - is that the Reserve Bank this morning had
>to make a line call.
>
>Judging future inflationary pressures is inherently an exercise
>in crystal ball gazing, and at the moment the data is inconclusive
>either way.
>
>However when working with Dr Don there is one thing we can always
>count on, his well proven ability to spot the dark cloud behind
>every silver lining.
>
>Anti©opyright Sludge 2002
>
>
>
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>This Story is at http://www.scoop.co.nz/mason/stories/HL0203/S00139.htm