Barry Soper: Cash rate announcement a trial of endurance

Reserve Bank Governor Graeme Wheeler announcing a lower OCR during his press conference in Wellington. Photo / Mark Mitchell
Reserve Bank Governor Graeme Wheeler announcing a lower OCR during his press conference in Wellington. Photo / Mark Mitchell

The diminutive man behind the podium with rimless glasses perched halfway up his nose became harder to distinguish yesterday as time dragged on. It was as though he was being viewed through the bottom of a milk bottle, such was the state of the eye glaze.

But then it was thirty seven minutes into a lecture on the economy, as we don't really want to know it, when the man who signs our bank notes - Graeme Wheeler - started talking about the output gap.

Others confided at that point they were feeling rather put out. They'd been locked up in the Reserve Bank for the past two and a half hours and even the comfort and the appreciation of the croissants, muffins and coffee was beginning to wear off.

READ MORE: Economy Hub: Rate cut - new mood or bluff?

Some admitted to fighting the need for a bit of shut eye and that fight became even greater when 'output gap' was explored

The enthusiastic Guv explained it was a very interesting question and was "a framework which looks at to what extent you have output gaps in the economy, in terms of the actual level of output compared to the potential level of output, now a lot of that has to be determined through modelling, because you can't observe potential output."

He went on to point out that "output gaps are still a very useful measure to indicate to what extent you've got surplus capacity or otherwise in the economy. And if you have a positive output gap then most central banks will believe that you'll get increased inflation pressures.

"You might have flatter Phillips curves but you might, or would expect to get increased inflation pressures, so no one's abandoning that model," that he could see, "they're aware that there are structural forces operating on inflation but they're still confident, as we are, in terms of that output gap framework."

The press conference was to explain why he was reducing the Official Cash Rate, which feeds through to lower mortgage interest rates, came to a close and so had a number of people's eyes.

So just to put it into some sort of context, an output gap is the difference between what a economy's capable of producing and what it's actually churning out. And a Phillips curve is where, if more people are in work, there will be higher inflation - basically because they'll have more money to spend.

The moral to the Reserve Bank story is that if you're talking to the great unwashed, then leave the text books in the vault.

Just imagine the confusion if you're invited to dinner at the Wheeler household and the Guv's at the head of the table and asks you to pass the sodium chloride and the piper nigrum. It'd be enough to make you reach for the formonitrile.


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