There has been a changing of the guard at the Reserve
Bank. Alan Bollard has retired after 10 years as Governor and Graeme Wheeler
taken on the top job. Mr Wheeler is a former executive at the World Bank and
most recently ran a consultancy in the US.
Although the governor may have changed, the Governor’s
message hasn’t. Last week Mr Wheeler left the official cash rate (OCR) at 2.5%
saying it is appropriate for now. That has led to a debate about the meaning of
“for now” (much like courtroom lawyers arguing about the meaning of “and”).
Some say that means an imminent rise, others say a fall. Strong opinions are being
advocated for both possibilities.
Those arguing for an OCR increase say it would cool the
housing market. That alone is unlikely to persuade the Governor given the property
market is only strong in Auckland and Christchurch and for their own reasons.
If anything, the vital signs are suggesting the OCR
should fall rather than rise. The economy is flat lining and inflation is below
the Reserve Bank’s 1-3% target range. A rate fall would probably lower the
value of the kiwi dollar (at least in the short-term), which would bring some
benefit to exporters.
Possibly the best “opinion” about the next OCR announcement
on 6 December 2012 is the futures market, ipredict.
Ipredict was established in 2008. It describes itself as
a “market-based political and economic forecasting system.” I would describe it
more like a betting agency.
Its power is in harnessing the wisdom of crowds. Unlike
an opinion poll, on this market punters actually put their money where their
mouth is and take a bet on a future outcome. Because they are putting their own
money at risk, they tend to be more accurate than polling where a person is
randomly phoned at dinner time on a Sunday evening.
Here’s an example of how the ipredict “market” works.
Essentially each contract pays out $1 should a specific event occurs, and
nothing if it doesn’t. It’s a straight win – lose. How much people pay for that
contract is a measure its probability of occurring. One of its contracts is the
outcome of the US Presidential race.
The Obama contract last traded at 55 cents, the Romney
contract 45 cents. In other words, at the time of the last trade punters
believe there is a 55% chance that Obama will win. Those buying an Obama
contract at 55 cents will receive $1 if Obama does win (and a profit of 45
cents per contract!).
That contract price changes continually up to
election-day as the contenders battle it out during the campaign.
The contracts are particularly important when the bets
relate to money matters. For example, the OCR contracts provide useful
information to a property investor about interest rates. At the time of writing
the various 6 December 2012 OCR contracts were trading as follows:
·
OCR
up by 0.5%, trading at $0.01
·
OCR
up by 0.25%, $0.01
·
OCR
unchanged, $0.88
·
OCR
down by 0.25%, $0.11
·
OCR
down by 0.5%, $0.01
In
other words those buying a contract that “Reserve Bank to not change the OCR on
6 December 2012” at 88 cents would receive $1 if that proves to be correct.
So
while economists may argue the pros and cons of changes to the OCR the “market”
says there is an 88% chance that the OCR will not change at the December review,
and if there is a change it is more likely to be down by 0.25%. Virtually
no-one believes the OCR will increase in December.
The
“no change” contracts for the 31 January 2013 and 14 March 2012 OCR reviews are
trading at 86% and 82% respectively.
Ipredict
have contracts for inflation, unemployment, the value of the stock exchange
index, chances of a recession, and others, including the future price of
petrol!
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