ECONOMICSC ullen’s Tongue Tripping

Finance Minister Michael Cullen has, in recent months, twice tripped on his tongue in manner which exposed him to charges that he is having more say in the fixing of interest rates than is permitted under the Reserve Bank Act. The legislation bestowed independence on the bank and its governor in the management of monetary policy. Cullen’s remarks implied he was indeed tampering with this independence.
The first occasion was during parliamentary question time on September 8. Reserve Bank governor Alan Bollard was scheduled to publish the September monetary policy statement the next morning and, according to 100 percent consensus of opinion in the money markets, would raise the official cash rate by another 25 basis points.
Cullen, the day beforehand, was given an opportunity to gush about the good things happening in the economy and made the most of it claiming that rating agency Standard and Poor’s had reconfirmed New Zealand’s double AA credit rating, its decision “based on this Government’s sturdy financial management”, and the National Bank’s “Business Outlook” which observed: “Good news about our economy seems to be everywhere.”
But Cullen went gush too far. “Although the Reserve Bank raised interest rates today, it did so because growth is so strong.” There was hub-bub in the House and National’s finance spokesman John Key smartly seized on the remark: “Can the Minister confirm for the House that he has just announced, in his answer to the question, the interest rate rise that we assumed the governor of the Reserve Bank would be announcing tomorrow?”
Cullen’s retreat from an obviously awkward spot was sounded by him saying that he was simply following the predictions of all economists. “All I can say is that if there is not one [increase], I will be very surprised indeed this time.”
More to the point, former Treasurer Winston Peters asked if the Minister of Finance had received any information suggesting that the governor of the Reserve Bank would lift interest rates, and if so, “how on earth could the governor be complying with this country’s law?” Cullen insisted the governor certainly had not told him what his intentions were in terms of the announcement next morning, but “I have had advice from Treasury that there is 100 percent unanimity amongst bank economists that interest rates are going to rise.”
A month later Cullen was in New York where session with Dow Jones analysts was included in his schedule. An account of what he said was duly disseminated to the world by Dow Jones newswires, providing the Nats with another chance to claim the Minister is pre-empting the governor on interest rate matters. “The bank has indicated with near certainty one more move, and then one or two more after that,” the news service quoted Cullen.
Not so. The governor had signalled one more certain increase and “maybe” one more.
Cullen had essentially told an overseas audience that floating interest rates could rise as high as nine percent, said Key, and levelled two criticisms:
* Dr Cullen “appears to be in breach of the convention which suggests the Finance Minister should not comment on such things”, and his Dow Jones remarks came only weeks after he pre-announced the recent Reserve Bank interest rate rise.
* Dr Cullen owed it to New Zealand mortgage holders to give them the bad news before he gave it to American analysts.
Deutsche Bank’s Db Daily (report) was more charitable. Its editors grumbled about the potential for some confusion to be caused by Cullen’s comments because the Reserve Bank’s monetary policy statement contained no such signals and governor Bollard did not signal the potential for three more rate rises in his appearance before Parliament’s Finance and Expenditure Committee. The Reserve Bank’s general message was that there would more likely be one hike in late October and possibly one other after that.
“Since it is unlikely that Dr Cullen wants to sound more hawkish than the RBNZ … we can only assume that he got confused about what the bank said and when it was said,” Db Daily concluded. “His last briefing from the bank was most likely prior to the September MPS, at which time it was clear that rate hike in September would occur with near certainty, followed by possibly one or two more moves in October and December – consistent with subsequent public comments.”
This is not only more charitable conclusion than was drawn by National’s John Key, but is also more likely: the Minister was probably guilty of little more than slip of the tongue, or of the memory, or some such. More importantly, the money markets were unmoved, just as they had been indifferent to Cullen’s interest-rates pre-announcement on 8 September.

• Bob Edlin is Management magazine’s regular economics writer.

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