The HSBC and WestpacTrust Banks lowered their floating mortgage rates in mid-January, about week ahead of the Reserve Bank’s review of the 6.5 percent official cash rate (OCR) on January 24. Because of its gearing to floating mortgage rates, higher OCR would have precipitated some embarrassing back-tracking in the market place. This gave those banks strong vested interest in wanting Reserve Bank governor Don Brash at least to hold interest rates that day, and preferably to lower them.
In the newsletters and other media they employ to promote their ideas and their banks’ interests, the chief economists at HSBC and WestpacTrust therefore urged Brash to go easy on interest rates. Economic conditions had changed since December, when he had signalled rise in the OCR, most likely early in 2001. The world economy was slowing, requiring downward revision of growth expectations, and the exchange rate was rising after last year’s sharp slide, lessening concerns about the inflationary impact from imports.
Next step in their push for lower OCR, once Brash had announced he was holding it at 6.5 percent, was for HSBC and WestpacTrust to forecast it would be lowered before mid-year. Bank of New Zealand chief economist Tony Alexander and some others did likewise. But Alexander does not expect people to rush to follow his lead, whenever he says interest rates will go this way or that. No individual economist anywhere around the world has had significant impact on market movements or expectations on interest rates or exchange rates since fellow named Henry Kaufman was doing his thing at Salomon Brothers in the United States back in the early 1980s. When Kaufman said interest rates would rise, they rose, and vice versa.
Alexander is candid about his limitations and those of his colleagues. If the BNZ takes position in the wholesale markets, it does not expect its economists to talk in support of that position, to persuade investors to behave in way that will help it make bundle, “That would be pretty rare thing these days and implies degree of credibility on the part of bank economists which may not really exist,” says Alexander.
True, there is public relations side to his job. The BNZ is keen to show its customers it has economic expertise behind the scenes of its business, investing and home-buying operations. His public statements and appearances help to assure people that bank decision-makers are getting good information.
Banks like the ANZ and National have regular monthly releases to catch news media attention, such as the jobs ads survey and business confidence surveys.
Alexander less proactively makes himself available to journalists, “to have chat if anyone rings up about what’s going on”. His personal objective is to make people in New Zealand as informed as possible about what the economy and interest rates are likely to do. “My focus is on getting across reasonable view, to counter what often I see as unreasonable views.”
In the middle of last year, when business confidence was slumping and news media were striking pessimistic tone, Alexander was advising people not to buy into the pessimism. He would explain the factors accounting for the downturn, then try to impress on his audiences why it would not last.
How willingly would he pitch himself into political row? He talks of his “democratic responsibility to point out to people the likely impact of government policies and policy options”. But bank economists should try to do this without becoming embroiled in political arguments. They should try to confine themselves to policy discussions, although this becomes difficult when policy is closely associated with specific political group, and people often misinterpret their comments on policies as comments on the parties.
Economic consultant Len Bayliss, who had Alexander’s job at the BNZ back in Rob Muldoon’s days as prime minister, insists he would say only what he thought was true. Otherwise he said nothing. But if he were bank economist today, he suspects he would be required to keep firm weather eye on his bosses and be aware of their corporate and political sensitivities.
Non-bank economists say their banking colleagues not only must promote their employer’s “brand” name but also the interests of the banking sector generally against competing claims for policy measures that would favour other economic sectors. This does not rule out differences of opinion. While WestpacTrust and HSBC were urging Brash to go easy on interest rates, Deutsche Bank and ANZ economists advised him to toughen up.
The differences of opinion are small beer, tending to focus on short-term market rate shifts and the implications for the money markets. This focus is risky.
Bob Edlin is Wellington-based economic commentator and journalist.
