Matt Nolan

RBA cuts 100 basis points

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100 basis points slashed by the Reserve Bank of Australia. There cash rate is now 6%. A 50 basis point cut was expected, 75 seemed possible, 100 is epic.

At the start of the recent freeze in credit markets a 75 basis point cut by the RBNZ seemed highly unlikely – but possible. Now a 75 basis point cut is looking increasingly likely – and 100 basis points also seems possible. To put this in perspective – the Bank may have felt that a 50 point cut in October was on the cards following the September cut. Financing costs have now moved up so much that it is (sort of) like the previous cut never happened – implying we need a 100 basis points of cuts just to get where the Bank was aiming, maybe 😛

Does this indicate that the economic situation for Australiasia has deteriorated rapidly – yes and no.

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goonix

Putting your money where your mouth is

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ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.

Goonix

Matt Nolan

September 2008 MPS preview

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On Thursday the Reserve Bank is going to take another look at interest rates – and they will also be releasing a new set of forecasts. Like last time, lets try to describe the Reserve Bank’s decision and state what they are likely to do (rather than stating what we think they should do).

Essentially, in a preview to the Thursday meeting we want to ask two overarching questions:

  1. How has economic data panned out compared to the June forecast – and how will this influence the RBNZ’s interest rate decisions,
  2. How has economic data panned out since July (when they cut rates – between forecasts) – and what does this tell us about the potential for interest rate cuts.

Once we have explored this is more detail – we can talk about the likelihood of of the Reserve Bank cutting rates given the net impact of the change in data.

For people that don’t want to read a long boring post, it appears the data from June-July was substantially softer, while data from July-September was stronger. In my opinion, the net impact of data over the past 3 months has made rate cuts more likely – but maybe not to the degree that the market has priced in.

If you want to read my reasoning – have a look below the tab 😉

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Matt Nolan

Keep the banks in mind

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I’m feeling sick today, so I won’t be able to write much.  As a result, I’m going to link to a good article over at the Rate’s Blog by Bernard Hickey.

I agree with his conclusion that the NZ banking system is in good hands – however, it is important to remember that it was trouble in the banking system that lead to the great depression.  As a result, the outlook for our banks will be incredibly important over the coming year – a factor that the RBNZ is definitely keeping an eye on.

Who knows, the real reason why the RBNZ is cutting rates and the RBA is on the verge of cutting may be issues in the banking sector (definitely something they would know and we wouldn’t).

Matt Nolan

What is poverty?

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Poverty is not an issue that we have touched on terribly much on this blog – however it is a fundamentally important issue when it comes to discussing what outcomes we want as a society.

Now the general impression is that poverty is bad, at least that is how I feel when I hear the word. However, a general feeling is not enough to base policy on – we have to define “poverty” and then define what we think is an appropriate way of increasing social welfare with respect to poverty.

There are two different ways of defining poverty in a population of people: Relative and absolute.

Absolute poverty measures tell us that if a person/household cannot afford a certain bundle of goods, they are experiencing poverty. Relative poverty tells us that if a person/household is in a certain income decile, or earns only a certain proportion of the average wage then they are poor.

A good casual defense of the absolute poverty measure is provided by Tim Harford (*) while a strong case for discussing relative poverty is given by Terence at LAANTA (*)

Now both poverty measures are extremely useful, but neither neatly fits into the strict “feeling” of poverty that society as a whole wants to deal with. In order to understand how to use these measures, we have to ask “why does society care about poverty”?

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Matt Nolan

RBNZ speech: Inflation targeting serves NZ well

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As I said, I will discuss the RBNZ speech from yesterday.

Personally, I thought the speech was spot on – Dr Bollard understands the issues associated with inflation targeting, but he also more than understands the benefits.

Look at this statement surrounding oil prices shocks:

Instead, the key policy requirement in this situation is to allow the initial externally driven relative price changes to occur, but keep monetary policy sufficiently firm to ensure that generalised second-round inflation effects do not take hold – in other words, to keep inflation expectations anchored.

This is all I wanted the Bank to say in their latest statement – that they would react to the second round of price increases stemming from an increase in oil prices if it occurs. Tell the market that, although the CPI figure looks bad, once we’ve cleared the recent shocks inflation will again be the primary concern.

Furthermore, the Bank damned alternatives to inflation targeting – specifically:

Another alternative that could appear superficially attractive is to require monetary policy to target multiple objectives such as growth, employment, export and the balance of payments. This was the approach taken in New Zealand and many other countries in the post-war period up to the early 1980s. It inevitably had a short-term focus, and resulted in stop-go policies and high inflation. We now know that one instrument cannot succeed in achieving multiple objectives over the cycle. The move to inflation targeting, with its single, clear objective, resulted from the lessons learned in that period. We do not want to re-learn those lessons.

Very good 🙂
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