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An interesting order of priorities! The OCR cut.

24/07/2008

invisible hit counter
The Visible Hand in Economics comments on the OCR 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).

Adam looks forward to TVHE’s promised additional commentary later.

Adam has this awful feeling that this was not the right move. Many will now expect cost pressures to ease when they will not. Further for manufacturers who use imported materials costs will now go up, thus increasing the incentives to relocate production off shore.

F/X following rate cut

F/X following rate cut

The graph (Hat Tip:Lou Taylor@No Minister) shows the impact post announcement by the RBNZ Governor.

Food prices will rise, indeed as export returns are likely to increase for dairy, there will be even less reason to hold back on domestic prices. Further, the cost of fertiliser, fuel, veterinary products, etc etc just got more expensive.

Health costs will rise also as drug purchase prices will go up, thus constraining Pharmac even more; plus the cost of other medical and associated supplies.

Fuel costs will rise further, thus forcing prices up. In turn this will stoke wage demands. Adam would not be surprised, if there is a change of government and perhaps even if no change, to see some labour action post election.

Perhaps Adam is too pessimistic, but see the hovering spectre of a lengthy recession and perhaps stagflation?

No Minister comments adversely on the OCR cut also.

4 Comments
  1. 24/07/2008 12:36

    Putting aside the judgement on whether inflation is really so beat up that RB interest rates can drop..

    A lower exchange rate may well have all the negatives you mention, but there’s no real indication that our high dollar was underpinned by a sound economy with good productivity and production across the industries.. so it had to drop at some stage and allow the export industries a fairer go. Trouble is, there’s 6 years of battering for these guys to recover from.

    Still, it had to happen and we all have to pay for the honeymoon. And Key may well have to prime an export surge to rebuild the confidence to invest and take risks.

    JC

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  2. adamsmith1922 permalink*
    24/07/2008 11:54

    Have corrected, my apologies

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  3. 24/07/2008 11:37

    Actually, it was Lou Taylor.
    I was working on my Winnie post at the time it happened 🙂

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