Thursday, 10 November 2016

"My work here is done"...

All as expected from the Reserve Bank today, the OCR cut to 1.75% and expected to stay there "for a very long time", as its head of economics John McDermott put it. All going well, Governor Graeme Wheeler can put his feet up for the final year of his current contract: his work here is done. And the economic outlook, while still beset by significant uncertainties, is looking good by developed economy standards: GDP growth in the pipeline of around 3.5% a year or a tad more, and the unemployment rate dropping to 4.5%.

Some interesting graphs from the Monetary Policy Statement. First up, what's been happening to the domestic 'non-tradables' inflation we generate here in New Zealand (I'd had a look too when then the latest data came out).


It looks like it's bottomed out and is now rising. More importantly, here's where the RBNZ thinks it is headed.


So we'll have to start recalibrating our thinking about what to expect when those brown envelopes hit the letterbox.

And then there's this, which shows how the RBNZ thinks the OCR might need to move if different combos of possible scenarios were to play out. Not everyone likes these 'fan' charts, but they have their uses, and in this one you can see the indefinitely-low OCR as the Bank's best call right now, but you can also see the range of uncertainty around it, running from an OCR of 0.5% through to 2.75%.


And I put it up just to remind people that, even with models up the wazoo, forecasting is an inexact art (as a certain election yesterday vividly reminded us), and that we ought to be a bit more charitable about those faced with making tough calls in uncertain circumstances (as I've also argued here and, especially, here).

The post-Statement press conference had its interesting moments. We now know, for example, that the "neutral" level of the OCR is now estimated to be around 4% rather than the 4.5% that might have been appropriate in a world where inflation was higher (an estimate adroitly winkled out by the NBR's Rob Hosking, whose write-up of today's decision is here).

Only the anointed get invited to the press conference these days, but if I'd been admitted to the elect, I'd have liked to have asked about what the Bank meant when it found, in its latest soundings with businesses around the country (reported on p25 of the MPS), that
High levels of competition are compressing margins and firms are thinking strategically about how to ease this pressure.
I'm pleased to hear about vigorous levels of competition, and not surprised businesses are looking for clever ways to cope. The smartest way would be to innovate yourself into a position where you can charge better prices for a better product.

But there can be less benign strategic responses to easing competitive pressure. These strategists are, I trust, planning to stay on the right side of s27 of our Commerce Act ("contracts, arrangement or understandings substantially lessening competition"), s30 (price fixing), and s47 ("A person must not acquire assets of a business or shares if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in a market").

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