Business NZ criticized the RBNZ for cutting the OCR by 50 basis point recently. It said that the current economic conditions do not warrant such a large cut.
The governor of the RBNZ issues a statement saying that the RB makes forward looking policy decisions, i.e., it is based on forecasts of domestic and global economic conditions, and not on current conditions.
Makes sense to me. Obviously, monetary policy affects the economy with "variable and long lags," i.e., it takes time for the OCR cut to work through.
That being said, there is an issue with the RBNZ OCR cut. It assumes that its forecast is reliable. No forecast is reliable. A forecast error could translate into a policy error. Policy errors are persistent. They are costly to undo. In this case, large policy move is riskier than small moves.
Economists usually argued for interest rate smoothing. A large shock, if indeed it is large, which requires a 50 basis points cut in OCR could have been smoothed out, 25 followed by 25.
Shocks are hard to identify ex-post let alone predict ex-ante.
But let's examine the RBNZ forecasts, which is posted in the MPS, chapter 4, pp. 26 - 35.
They do not indicate, to me at least, that there are problems that warrant a 50 basis point, surprise, cut in OCR!
Begin from the bottom page, forecasts up to 2020 show that, tradeables inflation is low - near zero; CPI inflation returning to the target; non-tradebales inflation is forecast to "dip" slightly. It looks like it increasing before dipping. This is basically house price inflation, asset price inflation. With lower OCR, house price inflation should increase!
Wage inflation is expected to increase!
The output gap is positive but they have a small decline in 2019!
These forecasts do not indicate a need for this large cut in OCR.
Employment does not look like falling. They say it is near maximum.
Unemployment increases very little over the forecasting horizon. These forecasts do not seem to warrant a 50 basis points cut in interest rate either.
Business investments up over the forecasting horizon, but the forecast is revised downward relative to last MPS forecast.
Fiscal stimulus supports a lift in GDP growth. Government consumption is up over the forecasting period and higher than that made in May MPS.
Households consumption is higher than the previous forecast, albeit weak, they said, 2 percent growth on average perhaps!
Residential investments do not indicate weakness, rather strong. House price inflation is up.
Overall, real GDP is projected to be "subdued" .
Net immigration remains elevated but is expected to decline.
Demand for New Zealand’s exports is slowing.
Import price expected to be lower.
Net immigration remains elevated but is expected to decline
They say that global conditions have continued to weaken, but I wonder how good is the RB forecast of global conditions.
I do not see anything alarming in these projections really. Therefore, the 50 basis point cut remains controversial.
The governor of the RBNZ issues a statement saying that the RB makes forward looking policy decisions, i.e., it is based on forecasts of domestic and global economic conditions, and not on current conditions.
Makes sense to me. Obviously, monetary policy affects the economy with "variable and long lags," i.e., it takes time for the OCR cut to work through.
That being said, there is an issue with the RBNZ OCR cut. It assumes that its forecast is reliable. No forecast is reliable. A forecast error could translate into a policy error. Policy errors are persistent. They are costly to undo. In this case, large policy move is riskier than small moves.
Economists usually argued for interest rate smoothing. A large shock, if indeed it is large, which requires a 50 basis points cut in OCR could have been smoothed out, 25 followed by 25.
Shocks are hard to identify ex-post let alone predict ex-ante.
But let's examine the RBNZ forecasts, which is posted in the MPS, chapter 4, pp. 26 - 35.
They do not indicate, to me at least, that there are problems that warrant a 50 basis point, surprise, cut in OCR!
Begin from the bottom page, forecasts up to 2020 show that, tradeables inflation is low - near zero; CPI inflation returning to the target; non-tradebales inflation is forecast to "dip" slightly. It looks like it increasing before dipping. This is basically house price inflation, asset price inflation. With lower OCR, house price inflation should increase!
Wage inflation is expected to increase!
The output gap is positive but they have a small decline in 2019!
These forecasts do not indicate a need for this large cut in OCR.
Employment does not look like falling. They say it is near maximum.
Unemployment increases very little over the forecasting horizon. These forecasts do not seem to warrant a 50 basis points cut in interest rate either.
Business investments up over the forecasting horizon, but the forecast is revised downward relative to last MPS forecast.
Fiscal stimulus supports a lift in GDP growth. Government consumption is up over the forecasting period and higher than that made in May MPS.
Households consumption is higher than the previous forecast, albeit weak, they said, 2 percent growth on average perhaps!
Residential investments do not indicate weakness, rather strong. House price inflation is up.
Overall, real GDP is projected to be "subdued" .
Net immigration remains elevated but is expected to decline.
Demand for New Zealand’s exports is slowing.
Import price expected to be lower.
Net immigration remains elevated but is expected to decline
They say that global conditions have continued to weaken, but I wonder how good is the RB forecast of global conditions.
I do not see anything alarming in these projections really. Therefore, the 50 basis point cut remains controversial.
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