July 08 OCR decision: Rates cut to 8.0%
Posted July 24, 2008
on:So the Reserve Bank cut interest rates to 8.0%.
The only new information that has come out since June is a higher inflation outcome as a result of larger than expected increases in petrol and food prices. Furthermore recent increases in funding costs have helped to convince the Bank to cut.
Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).
Good Bloomberg piece here.
More discussion to come later (the additional discussion has now appeared).
15 Responses to "July 08 OCR decision: Rates cut to 8.0%"
Well, it could be that they’ve moved from not caring about it at all to positively preferring it.
it is a time inconsistency problem, but the reasons for the inconsistency I see as this;
The reason for the current high prices is the booming worldwide economy over the past few years. This boom has ended yet we are still suffering from increasing costs. increasing interest rates at this stage would do little positive about this because it is the effect of the past few years. by lowering rates it keeps the economy moving. the negative outcomes of keeping interest rates high are worse for the economy. If I am wrong can you clarify? i’m not a macroeconomist.
I also have a feeling that there has been some sort of govt discussion to take the focus off solely being on inflation. Similar to overseas jurisdictions where monetary policy is based on many factors, not just inflation. while in NZ officially it is only inflation, the govt/RB probably has a wider view of its responsibilities.
Who says inflation is expected to hit 5%? I would have thought that inflation expectations are starting to curb, but the economy is looking fragile, so lowering rates makes sense… no?
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1 | Eric Crampton
July 24, 2008 at 9:15 am
I’m surprised. I’d have guessed no more than 1/3 chance they’d have made the cut. Now, do I revise my expectation about the extent to which the Bank fails to care about inflation, my expectation about the real economic data, or both?