Timely oiling of MCI seesaw

By BRIAN FALLOW

In pumping the accelerator once more for good measure Reserve Bank governor Don Brash has given reassuring evidence that he has not been dazzled by the recent rally on world equity markets and can clearly see the hazards ahead on the road to recovery.

The steep rally on sharemarkets, led by Wall Street, over the past month is hard to credit.

Certainly the international news has been better, with the Federal Reserve easing, Japan passing its long-awaited banking reform package, and the International Monetary Fund being equipped with a $US90 billion firefighting fund.

But it is quite a stretch from there to conclude, as investors appear to, that the international crisis is past, policymakers have matters in hand, Asia will take all the hit in reducing global overcapacity and the United States and Europe will escape with a period of sub-trend growth.

Fed chairman Alan Greenspan when cutting US interest rates yesterday, for the third time in just over a month, warned that "although conditions in financial markets have settled down materially since mid-October, unusual strains remain."

Both central bankers seem to be taking a more cautious view of the outlook than the more excitable participants in the markets.

Some observers are now suggesting a serious global recession may be a realistic possibility, Dr Brash said yesterday, though that is not the Reserve Bank's view.

It is forecasting a "reasonably soft landing" for the US and Australia, with modest growth sustained in Western Europe.

But it said that significant risks surrounded that forecast and that in any case it was not conducive to the sort of export growth that helped propel the New Zealand economy out of its last recession.

We have entered a period where, in contrast to the past 18 months, the markets are taking a more hawkish view of the outlook than the Reserve Bank does and will keep monetary conditions somewhat tighter than the bank believes is necessary.

One of the factors keeping the MCI higher over the past month than the bank had indicated it was comfortable with was Dr Brash's comment on October 21 that he regarded interest rates as "undesirably low", which was seen as putting a floor under interest rates.

He backed away from those comments yesterday, saying that he would take whatever mix of exchange and interest rates the markets delivered, provided always that overall monetary conditions remained consistent with the bank's price stability goal.

Oiling the MCI seesaw in this way is timely. As markets look for a turning point earlier than the mid-2000 Dr Brash somewhat optimistically foreshadowed yesterday, this will tend to put upward pressure on the dollar and interest rates need to be free to fall to compensate.

--Between The Lines, Business HERALD

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