No need for fiscal stimulus – monetary policy is coming
Posted by: Matt Nolan on: December 2, 2008
Or so says John Key. Very interesting.
Ok, as Prime Minister, John Key needs to stop talking about monetary policy!!! Luckily Kiwiblog has already covered this – so you won’t get another rant from me 
I am not sure whether he is speculating, or whether he’s been briefed and then wandered off and spilled the beans. All I know is that he pushed up the price of the “over 100” contract on iPredict.
All I know is that my pick of 75 is looking increasingly unlikely – Australia’s decision tonight will make everything a lot clearer . However, I am glad to see that he agrees with the idea that we don’t need to be introducing a fiscal stimulus.
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20 Responses to "No need for fiscal stimulus – monetary policy is coming"
December 2, 2008 at 2:54 pm
“I very much doubt that JK’s comments are behind that move. What is behind the move is a 680pt fall on Wall St, the terrible data released overnight which drove that, and the consequent big rally in both NZ and AUS interest rates today”
Maybe – the collapse in the Dow still puts it well below its lows. However, the poor Chinese PMI numbers may be concerning …
Overall, I would say that it is conceivable that people assumed he had information and reacted – but I agree that the majority of the move will have been the result of over-night events. I was being a little tongue in cheek with the comment – my main goal in the post was to make the final paragraph and relink to my article 
December 2, 2008 at 2:59 pm
The Dow is off its lows but the major US and Euro bourses all failed in a spectacular way to break up through the downtrend overnight, so technically look headed for new lows (fundamentals also point this way imho). China’s PMI was just one of the bad numbers – witness Aussie, UK, Euroland, emerging Europe, US ISM, all making multidecade lows.
December 2, 2008 at 3:06 pm
“China’s PMI was just one of the bad numbers – witness Aussie, UK, Euroland, emerging Europe, US ISM, all making multidecade lows.”
But in terms of expectations – the Chinese one was the surprise.
The question is – what new information was there. I’m not saying that the other reports weren’t significant – but the Chinese one is the only one that seriously made me attack my prior probabilities. The others were expected to be massively trash.
For example, the US index was at its lowest level since 1982 – however this was expected given that deteriorating economic conditions have seen the exchange rate INCREASE. My friend, the US is in some serious trouble:
http://tvhe.wordpress.com/2008/09/22/one-thing-that-worries-me-about-the-us-economy/
For New Zealand the key is what happens in Asia – we have to accept that the US market is not going to provide much strength for us in the coming years.
If the Asian market is giving way, and with the Middle East suffering a massive negative terms of trade shock, our exports could be in trouble – hence why I put such a disproportionate weight on the Chinese result.
December 2, 2008 at 3:31 pm
I would argue that China’s poor PMI simply reflects the fact that the rest of the world has stopped buying. China is not the cause of the global slowdown, it is the consequence. In that sense I think that all that we have seen across the G3 +UK is very important. Let’s see what the RBA makes of things in 60 mins – Aussie market has rallied 25bps today and so is now pricing close to a 125bp cut. If they only cut 75bps as per economist expectations there will be carnage in mkts.
December 2, 2008 at 3:38 pm
“China is not the cause of the global slowdown, it is the consequence. In that sense I think that all that we have seen across the G3 +UK is very important”
I agree – but the debate was about whether domestic (and pan-Asian) consumption was a sufficient substitute for US and European consumption – as if it is, resources keep keeping utilised and Asia ex Japan keeps on rolling. A poor PMI outcome, if sustained, puts this idea to the sword a bit.
The Asia countries have large current account surpluses – they have been savings a whole lot. If US/Europe demand slows this should be compensated for by an increase in Asian spending – as they will want to “smooth consumption over time”. However, if this does not occur it indicates that there are still significant institutional issues in some Asian countries – this is the big unknown (namely, the liquidity of savings in Asia, and the ability for prices to adjust). As a result, high prior levels of savings may not lead to strong consumption now.
“Aussie market has rallied 25bps today and so is now pricing close to a 125bp cut. If they only cut 75bps as per economist expectations there will be carnage in mkts.”
Very interesting – we will see soon.
December 2, 2008 at 4:37 pm
100 point cut it is. Buy up on the 100 point cut on ipredict people, it will rally.
December 2, 2008 at 4:41 pm
“100 point cut it is. Buy up on the 100 point cut on ipredict people, it will rally.”
Good rule of thumb is Aussie cut + 25 (as that keeps the same rate gap given recent movements).
As a result, a betting man should look for 125 on Thursday.
I would note that the Aussie central bank is heavily worried about the terms of trade and confidence, as a result we need to ask:
1) Is our confidence as bad (in relative terms),
2) Is our negative terms of trade shock going to be as big.
Answer these, and you can get an idea of what is going to happen on Thursday
December 2, 2008 at 4:59 pm
If the RBA are prepared to take their cash rate to 4.25%, there is no way the RBNZ will be doing less than 125bps given (a) their economy is stronger than ours and (b) their monetary policy transmission mechanism works more quickly than ours. Cements in 150bps for me.
December 2, 2008 at 5:06 pm
I called the Aus rate cut and swept the pool at work. My pick is 1.5 for NZ.
December 2, 2008 at 5:07 pm
“(a) their economy is stronger than ours and (b) their monetary policy transmission mechanism works more quickly than ours”
There rate of growth in potential output is also higher – so just because their economy will grow faster does not mean that we should necessarily follow.
The key is the relative change in the terms of trade – if our terms of trade is not going to decline as markedly as the Aussies then there is no reason to expect as large a cut.
Secondly, it isn’t clear that there monetary transmission path is quicker. There was an argument that New Zealanders fixed on longer terms would slow down the transmission path, but the Bank found that this argument was exaggerated:
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008jun71_2sethi.pdf
Effective mortgage rates are now reacting more quickly (as average fixed mortgage rates have come down), so even if this argument held weight before, it is not so appropriate now.
The 100bp cut makes 125bp by us the most likely – but without a clear idea of how the RBNZ thinks that the change in world demand will hit the TOT it is hard to tell exactly what they will pick
December 2, 2008 at 5:07 pm
“I called the Aus rate cut and swept the pool at work. My pick is 1.5 for NZ.”
Congrats
Did no-one else pick 100?
December 2, 2008 at 5:10 pm
Yeah the ‘other’ stock on ipredict has in fact rallied. I made some money operating around the margins anyway. 
December 2, 2008 at 5:23 pm
Matt – with 85% of Aussies on floating mortgages and 85% of Kiwis on fixed mortgages, it simply must be the case the Aussie households will see more immediate relief than their NZ counterparts. NZ’s unemployment rate has gone from 3.4% to 4.2% this year, Aussies from 4.1% to 4.3%…I’d argue that we have more downside momentum even before the global downturn accelerated in Sept.
December 2, 2008 at 5:31 pm
“NZ’s unemployment rate has gone from 3.4% to 4.2% this year, Aussies from 4.1% to 4.3%…I’d argue that we have more downside momentum even before the global downturn accelerated in Sept.”
I would agree that we had more downward momentum.
However, I would note that potential growth in NZ is still lower, and monetary policy has to take account of that.
As a result, the appropriate margin for comparing the relative size of the interest rate cuts must stem from the factors that have changed for the relevant economies.
The fact is that the Aussies terms of trade faces more downside risk than the New Zealand terms of trade from recent events – if the change in the TOT is the main driver of both Bank’s decisions, then the relatively bigger decline in Aussie implies that there will be a bigger cut to rates.
Of course, I think that a TOT shock also counts as a “supply side shock” – as it implies that we can get more imports for the same level of domestic capacity. If this is taken to be the case (which I don’t think either of these central banks do) then I can’t make any sort of relative comparison.
Ultimately, I think a good rule of thumb is that the RBNZ will try to keep the interest rate gap constant – this gives us a 125bp cut.
The main thing I am interested in now is the forecasts – and how they justify what is going on. I am surprised that the Aussies did not mention falling petrol prices at all – this is an issue for our RB!
December 2, 2008 at 7:02 pm
I don’t disagree that Aust has a higher potential growth rate. But even allowing for that NZ’s growth rate this year is clearly further south of its potential than is the case in Aust, as reflected in the relative labour mkt performance.
I think that the reality is that the RBNZ’s decision is more complicated than just looking at the relative terms of trade. To name but one factor, I’d point to the dynamics in the NZ housing market has justifying a policy response that is at least as aggressive in magnitude and rapidity as that in Aussie.
As far as Thursday is concerned, I’m not especially interested in the RBNZ’s forecasts right now. I’m far more interested in the forecasts that are coming from offshore. Ultimately they will drive the RBNZ’s forecasts with a lag in my view.
PS Whilst I agree that Aussie’s terms of trade will fall more than NZ’s, we can’t lose sight of the fact that Aussies rose about 3 times as much as ours in the first place. On a relative commodity basis NZDAUD should be trading at about 70c.
[...] its 7.30am for me so the Bank is yet to announce it. We have discussed this wildly though (here, here, and here) – so it will be good to see what has [...]
December 8, 2008 at 10:32 am
“To name but one factor, I’d point to the dynamics in the NZ housing market has justifying a policy response that is at least as aggressive in magnitude and rapidity as that in Aussie.”
Really? We have just come out of an enormous housing bubble, and even with recent house price declines houses are still (according to most objective measures) massively over-valued.
On the construction side there are massive problems – but that stems from credit rationing in a specific market. If banks are appropriately managing risk here then there is nothing for the RBNZ to get involved with.
“Whilst I agree that Aussie’s terms of trade will fall more than NZ’s, we can’t lose sight of the fact that Aussies rose about 3 times as much as ours in the first place. On a relative commodity basis NZDAUD should be trading at about 70c.”
Indeed it did – however, the change in interest rates is a reaction to a negative shock, and the fact is that the negative shock is larger for them than it is for us.
[...] of arbitrary complaining – but there is a fine line between pointless talk on the exchange rate and interest rates and damaging market signals by creating “false information”. The information [...]
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December 2, 2008 at 2:44 pm
I very much doubt that JK’s comments are behind that move. What is behind the move is a 680pt fall on Wall St, the terrible data released overnight which drove that, and the consequent big rally in both NZ and AUS interest rates today. Mkt now priced for 143pts on Thurs. Ipredict is simply catching up with that.