These two terms appear everywhere in the business literature these days. It is fashionable to be “dovish” for most central banks in the world nowadays. New Zealand seems to be an hawkish exception, as they still have a relatively high interest rate of 6.5% (It was just lowered from 7.5% a few minutes ago). Is this interest rate, according to Austrian analysis, more adequate than the viertually zero you find elsewhere, or even in New Zealand it should be a lot higher?
I have read in New Zealand papers that Royal Bank of New Zealand Governor Alan Bollard has been criticized very much for insisting in interest rates much higher than in the rest of the developed world. However now New Zealanders have been able to cut those interest rates and still such rates are well above zero, a luxury that most other countries do not have.
My question is, has New Zealand monetary policy been more sound than that of other industrialized countries?
It has always impressed me that in New Zealand they are very concerned in keeping their inflation under their very strict target. Is that good policy?
NEWS RELEASE
Date 23 October 2008
Time Embargoed until: 9:00am
OCR reduced to 6.5 percent
The Reserve Bank today reduced the Official Cash Rate (OCR) from 7.5 percent to 6.5 percent.
Reserve Bank Governor Alan Bollard commented that "ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today’s decision.
"Economic activity in New Zealand will be further constrained, relative to the outlook presented in our September Monetary Policy Statement, by these international developments. New Zealand can expect to face lower demand for exports and credit is likely to be less readily available. In this environment consumers and businesses are likely to be more cautious and curtail spending.
"The reduction in domestic spending will be partly offset by the depreciation of the New Zealand dollar over the past few months, falling oil prices and the recent loosening of fiscal policy.
"With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.
“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”
I don’t think any Austrian is in favor of central banking, but it is better if a bank expands the monetary supply less than its contemporaries, I would imagine.
You are grasping my point. New Zealand is a very, very small economy, and somehow their central bank has managed to have a significantly more responsible central banking policy than its bigger trading partners. If you look back into the New Zealand papers over this year, you will see almost daily heavy political criticisms on the part of the exporter lobbies threatening to fire their Central bankers for their “rigid” money supply management. Everywhere else I read the word “lax”, not rigid.
I think, due to the political realities of today’s world, they have done a rather impressive job.