'Tis the season to read Bollard - between the lines

By ELLEN READ

In a break with tradition, the Reserve Bank made a surprise public announcement yesterday - cunningly disguised as a simple Christmas greeting.

New Governor Alan Bollard has brought his tradition of composing the annual Christmas card with him across the road from the Treasury, to the central bank.

This year's offering tells the cautionary tale of Goldilocks and the correct temperature of porridge, possibly a subtle reference to happier times in the 1990s when the United States was referred to as the "Goldilocks economy", not too hot, not too cold, but just right.

Knowing how the markets hang on Bollard's every word, the Business Herald consulted a couple of economists for their takes on the seasonal ditty.

Tongue planted firmly in cheek, Bank of New Zealand chief economist Tony Alexander suggested the bull represented business groups who want interest rates as low as possible so economic growth - they believe - will roar away and all will be well with the world.

The bear was a reference to inflationphobes who want inflation as close to zero as possible, the result being weak growth.

Goldilocks he saw as the arbiter, standing between those wanting inflation to creep up and those who saw rising prices as Satanic.

The kicker, according to Alexander, was the closing reference to stability, also reflected in the "Stability is next to Godliness" wall hanging.

"So if I were looking for a hidden message in the card, it would be a secret desire by the RB Governor to achieve price stability, rather than inflation of 1 to 3 per cent."

If forced to take a position based on the card, he would expect increases in the official cash rate soon, bringing much lower medium to long-term bond yields and a higher currency as the interest rate differential with the rest of the world blew out.

Adopting a Scrooge-like stance he said, "I would downgrade my economic growth forecasts and sell the currency after it had risen on the back of higher short-term interest rates in the expectation of a recession."

By contrast, Westpac chief economist Adrian Orr points to the significant addition of the word "almost" alongside neutral.

This can only be read as a shift from the RBNZ's neutral November monetary policy statement, he maintained, as the "almost" highlights the bank's growing discomfort with inflationary pressures.

In addition, he said, the message showed porridge prices were coming under increasing scrutiny, overtaking previous concern about house prices.

"Aucklanders may breathe a sigh of relief, but pity those high-country mainlanders."

But the big question, said Orr, was the message that "stability is next to godliness". Stability in what, he wondered. Stability in output, porridge prices, interest rates, or the exchange rate?

"Homeowners pray for stable interest rates, while farmers collectively chant the exchange rate. Can all our Christmases be delivered?"