Monetary policy has turned neutral

Just a quick update on where overall monetary conditions have got to - if you haven't come across the Monetary Conditions Index before, this or this will see you right -  given that the Kiwi dollar has plunged and interest rates have moved lower.

The graph is the historical record based on monthly data from the Reserve Bank: the star shows where we are today (based on 90 day bank bills at 3.07% and the TWI at 70.4).

In sum,we've already arrived at a 'neutral' setting for overall monetary policy. That's reasonable, given some slowdown in the economy and inflation still lying below the RBNZ's target range. We'll know on Thursday whether the RBNZ will fire the next 0.25% gun and take us towards the 'easy' end of policy, and then there'll be a pause till September 10.

It's just as well there's a pause for thought: I'm not sure - at least not yet - that there's a compelling case for a whole clatter of further rate cuts. Yes, the dairy price has plunged, and yes the latest ANZ and NZIER surveys were weakish, but on the other hand the latest BusinessNZ/BNZ PMIs for manufacturing and services were both solid. A time out is just the ticket: to see what the net trend really is, and to give some further time to try and get the Bank's head around the reasons for our unusually low rate of non-tradables inflation,