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Posts Tagged ‘Monetary Policy’

New Zealand inflation not expected to hit 2% until March 2018

March 10, 2016 Leave a comment

Today Graeme Wheeler the RBNZ governor announced at 0.25% cut in the OCR – now 2.25%. He listed the following reasons for the cut:

  • Significant fall in inflationary expectations. The RBNZ has forecast that inflation will only reach 0.5% by September this year and 2% in March 2018. Since the GFC in 2008 weak inflation has been prevalent in the world economy and with the collapse in oil prices it has got weaker in the second half of last year.
  • Globally there is also decline in core inflation – a measure of inflation that excludes certain items that face volatile price movements. Therefore there is little or no imported inflation to talk about. A depreciation of the $NZ could mean an increase in the price of imports but would make New Zealand exports more price competitive – something that Graeme Wheeler is keen on given the weakness of New Zealand export prices.
  • A decline in the global outlook – interest rate cuts in Japan, EU and the UK accompanied by weaker growth in China. See graph below of Central Bank rates.

Surprisingly enough he said that the lower Fonterra milk payout was not a major factor in the bank’s decision as it was just a reflection of weaker global demand. Graeme Wheeler did suggest that one more rate cut might be on the cards – ‘monetary policy will continue to be accommodative’

CB rates

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US economy – was it right to raise interest rates?

January 7, 2016 Leave a comment

Interest RatesData out of the US seemed to warrant the Federal Reserve’s decision to raise its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent on December 16th 2015. Below is the data:

  • Unemployment – was at 5% although the US lost 8.7m jobs during the recession it has gained 13m since then.
  • Wages – have been increasing to 4% in the Q3 2015 suggest that there is little surplus labour available.
  • Oil prices – may have bottomed out so this suggests inflation may pick up in 2016. As there is a pipeline effect with the impact of higher interest rates it may be prudent to increase rates sooner.

What are the concerns?

  • Wages increases maybe temporary especially if young workers are enticed back into the labour market.
  • Inflation is 0.2% which is well below the 2% target. Even when you take out energy and food prices core inflation is only 1.3%
  • Interest rates are still very low and there is little scope for cutting them if the increase has a slowing effect on the economy
  • With most Americans on fixed mortgages the interest rate increase has a limited impact on the cost of borrowing.
  • A higher US dollar will make exports less competitive and Americans manufacturers will struggle evenmore trying to sell in overseas markets.

Stanley Fischer, the Fed’s vice-chair, recently estimated that a 10% rise in the dollar reduces core inflation by half a percentage point within six months. The US Fed chair Janet Yellen is unlikely to persist with rapid rate rises if they push inflation too far below target in the short term.

Source: The Economist – 18th December 2015

AS and A2 Macroeconomics: Internal and External Balances

October 15, 2015 Leave a comment

In explaining the differences between internal and external balances I came across an old textbook that I used at University – Economics by David Begg. It was described as ‘The Student’s Bible” by BBC Radio 4 and I certainly do refer back to it quite regularly. Part 4 on macroeconomics has an informative diagram that shows the impact of booms and recessions on the internal and external balances.

Internal Balance – when Aggregate Demand equals Aggregate Supply (potential output). And there is full employment in the labour market. With sluggish wage and price adjustment, lower AD causes a recession. Only when AD returns to potential output is internal balance restored.

External Balance – this refers to the Current Account balance. The country is neither underspending nor overspending its foreign income. For a floating exchange rate, the total balance of payments is always zero. Since the balance of payments is the sum of the current, capital, and financial accounts, saying the current account is in balance then also implies that the sum of the capital and financial accounts are in balance.

In the diagram right the point of internal and external balance is the intersection of the two axes, with neither boom nor slump, and with neither a current account surplus nor a deficit.

The top left-hand quadrant shows a combination of a domestic slump and a current account surplus. This can be caused by a rise in desired savings or by an adoption of a tight fiscal policy and monetary policy. These reduce AD which cause both a domestic slump and a reduction in imports.

The bottom left-hand corner shows a higher real exchange rate, which makes exports less competitive, reduces export demand and raises import demand. The fall in net exports induces both a current account deficit and lower AD, leading to a domestic slump.

In a downturn a more expansionary fiscal and monetary policy can hasten the return to full employment eg. Quantitative easing, tax cuts, lower interest rates. However one could say that today it doesn’t seem to be that effective.

RBNZ – 25 basis points drop works out!

September 10, 2015 Leave a comment

Just had a great day at the RBNZ for the Monetary Policy Statement this morning – as you may know the RBNZ dropped interest rates by 25 basis points. Below is a bit of humour as to how they arrived at their decision.

NY cartoon

And they say we are not thinking practically!

How much wriggle room do countries have?

July 21, 2015 Leave a comment

The Economist has devised a composite measure of interest rates, deficits and debt which are mechanism that tend to be used by a country’s policymakers to cope with a recession.

Interest Rates
They assign a value of 100 which is maximum wriggling room – that is interest rates that are 10% or above. A value of 0 means there is no room to drop interest rates i.e. interest rate are 0%.

Deficits
They assign a value of 100 to those countries that have budget surplus of 5% of GDP or above. A value of 0 is given to deficits of 15% of GDP or more.

Debt
They assign 100 to a country that, in the IMF’s view, can borrow a further 250% of GDP or more and 0 to those, including Greece, Italy and Japan, that it judges to be testing markets’ faith.

The chart below shows how countries rank. Norway, South Korea and Australia are top and have all kept their interest well clear of 0% and have very low debt levels. On average the rich world’s wriggle room has fallen by about a third since 2007. The leeway of hard-pressed countries such as Italy and Spain has shrunk by nearly half.
Wriggle Rom

ECB and Negative Interest Rates

March 12, 2015 Leave a comment

The European Central Bank (ECB) recently announced that when banks now deposit money with them that it would pay -0.2%. In other words banks have to pay the central bank for the privilege of depositing money with them.

What is a negative real interest rate?
A real interest rate is the stated rate (2.5%) minus the inflation rate (2%) – real rate = 2.5% – 2% = 0.5%. As real rates fall it attracts more borrowing and less saving.

*Savers lose money each year to inflation
*Borrowing and consumption should rise.

Euro Zone – Interest rates 0.05%, inflation -0.6 = real rate of 0.65%

To get negative real rates, the nominal interest rate must be lower than the rate of inflation; if inflation is negative, the nominal interest rate must also fall below zero. As soon as the rate banks offer fall below that, savers have an incentive to withdraw their money and put it under the mattress. By charging negative rates the central banks are hoping that the trading banks will keep more of their money and therefore lend it out to investors. However the desire to reduce a banks reserves is futile as if someone borrows money from a bank and buys a new car the money is paid to the car company who will then deposit the money in their account which increases the reserves of the bank.

Central Bank Rates March 2015

Central Bank easing on a global scale.

February 24, 2015 Leave a comment

Below is an image I got from the Business Insider site that shows the extent of monetary easing and tightening by Central Banks around the globe.

CBs Monetary Policy

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