Basic knowledge of financial data can help save money

By JANINE OGIER

Economic statistics can seem dry and dull, but what's going on in the economy affects your back pocket.

A little understanding goes a long way to anticipating interest rate changes and helping plan finances.

The Reserve Bank of New Zealand independently decides monetary policy and sets a benchmark interest rate, called the official cash rate (OCR), which commercial banks use to determine mortgage, deposit and lending rates.

When the letter arrives to say your variable mortgage rate is going up or higher term deposit rates encourage you to save more, the Reserve Bank has made an OCR decision.

So Thursday's Reserve Bank decision to raise the OCR to 6 per cent will likely filter down to a personal letter from your bank soon.

The financial markets fluctuate according to opinions about what is happening in the economy and how banks and brokers think the Reserve Bank will react.

Other things influence the markets too, but at 10.45 on a morning when Statistics New Zealand is releasing important economic data, all eyes and ears are alert. And then the interpretation begins.

Certain results increase the likelihood of the Reserve Bank raising interest rates and others have the opposite effect.

One positive piece of data might not be acted upon immediately by market players until more data backs it up.

Deciphering the signals earns analysts big dollars and creates a huge amount of stress about being right or wrong because investors, big or small, can decide investments after considering such analysis.

Some people think it is just as easy to pin the tail on the donkey as it is to predict what is happening in the economy but there are some simple signs to bear in mind.

Plus the process is quite transparent so you should be able to follow what is going on. It is like a weather forecast - sometimes the rain pours as predicted, while other times the sun unexpectedly shines.

Economists try to identify the turning points and duration of a business cycle.

Crucial signals for monetary policy are drawn from a number of indicators, which include statistics on immigration, and surveys to gauge spending and production intentions.

An example is the Westpac McDermott Miller consumer confidence survey. Released every quarter, it asks people about major household purchases they intend to make.

Similarly, business opinion surveys like the National Bank business outlook report question business people about their forward sales profile, whether they are optimistic about future opportunities, and if they will be taking on staff or laying off workers in the months ahead.

Immigration data is a leading indicator because the number of migrant arrivals affects the economy as people establish themselves in jobs and homes.

There are also lagging indicators, which are important for policymakers, but less so than the leading indicators because the data have to accumulate over time before any conclusions can be drawn.

The gross domestic product figures are the main indicators and they measure economic output.

The problem with lagging indicators such as this is that they are known way after the fact, for instance those for July-September won't be public until December 22.

Underpinning the lot is the quarterly Reserve Bank monetary policy statement. In this document, the central bank's economics experts predict what they think is going to happen in the next two years, including forecasts for the direction of the OCR.

The governor, at the moment Alan Bollard, considers all the information from his team, analyses financial market opinions and closely watches statistics as they unfold. He determines the OCR about every six weeks.

The main thing he bears in mind is the Reserve Bank's commitment to keep inflation within a 1 per cent to 3 per cent band over the medium term.

Apart from causing immediate variations in mortgage rates, changes to the OCR - such as the 25-basis-point rise announced on Thursday - also have a delayed impact on spending and saving months later. So Bollard determines interest rates now with an eye to how that will affect inflation one to two years away.

* Janine Ogier is a Christchurch-based freelance journalist